Pimco Total Return ETF

"Mr. Gross’s new actively managed exchange-traded fund, the Pimco Total Return ETF, returned 2.52% from its Feb. 29 launch through April 12, according to investment-research firm Morningstar MORN +0.13% .

Not only did that beat its benchmark, the Barclays Capital Aggregate Bond Index, by 2.48 percentage points—it also trounced the mutual fund whose strategy it is supposed to track. The Pimco Total Return fund, the world’s largest bond fund, with $252 billion in assets, returned just 0.74% during the period."

http://online.wsj.com/article/SB10001424052702304750404577322152542285434.html?mod=WSJ_latestheadlines

This is just an example, of course. In my opinion, once you consider trading costs, ETFs are a good choice for most people who want to invest in certain sectors, strategies, or alternative assets. Sure, you might do better on your own, but you probably won’t.

Yahoo Finance page for BOND (what? I can’t believe no one used that ticker before).

http://finance.yahoo.com/q?s=BOND&ql=1

I think it’s safe to say that an actively-managed bond portfolio is hard to run without good infrastructure.

The ticker used to be something else, but then they got the guy who owns BOND to let 'em use it. I think I remember talking to a guy a few months back who said he either owned that ticker or knew the guy who did (can’t remember now for the life of me what exactly the deal was), so it was funny when I heard about PIMCO getting it.

The 5 and 10-year performance on that mutual fund is good, but the strong recent performance may just be a result of them significantly underperforming last year. If Pimco was positioned last year to have a lower portfolio duration and underperformed, then presumably the rise in yields so far this would benefit them vis a vis their competitors.

How does the arbitrage mechanism work for the PIMCO TR ETF? Does PIMCO publish its full bond holdings so that arbitrageurs can keep the ETF price in line with the fund’s? And if so, does that mean we can all just replicate PIMCO’s stuff by owning the same things in the same proportions without paying PIMCO fees?

Their website has a Statement of Additional information that has the Creation/Redemption rules. Looks to be the same across all their ETFs. I can pull up all their holdings on Bloomberg with BOND US MHD, looks solid. Of course, your average Joe couldn’t replicate the strategy for less than the 55bps PIMCO charges.

Yeah, especially in the really liquid large cap type markets, ETF is a good way to go. Yet BillG is a beast so I would rather keep my money there…

To view the holdings go here:

http://investments.pimco.com/Products/pages/346.aspx?ShareClassCode=INSTL

I’ll save you some time though. No, you can’t replicate the holdings of the largest bond fund in the world for a lower fee. They have over 7000 positions including several hundred derivatives all for the low cost of about 50 bps. But, because they’re so gigantic, the only way they can really drive return is by taking duration bets. Since you won’t know how they’re positioned until 30 days after month end, it would be impossible to even match their duration timing.

If you want to match Bill Gross, you have to buy his fund.

OK, so who goes and arbs the ETF? And can’t they replicate his strategy if they have the information to arb it. Maybe I can’t do it, but I’d think someone bigger than me and smaller than PIMCO could.

I’m mostly asking to figure out how active ETFs work. It sems to me that as the basket changes in response to active management decisions, one party (not sure which one) has got to be able to front run the other, and that starts to defeat the effectiveness of active management.

I can see how simple mechanical rules could become active ETFs, but I can’t see how discretionary portfolio decisions can really translate into an active ETF that gets arbed to be in line with the underlying process without negating the issuing firm’s comparative advantages.

The information doesn’t exist to arb the Total Return ETF through replication no matter what your resources. PIMCO - or any other active manager - can’t give out real time holdings data, nor would they if they could. I don’t believe anyone would be willing to trail Bill Gross by 30 days since he makes huge bets very quickly, and tends to move the market when he does.

The only arb opportunity I see is the expenses between the ETF and the various share classes of the mutual fund. There’s no reason for the ETF to trade at a significant premium or discount since the exact same strategy is readily available as a fund at any discount broker at the same price (basically).

The same is true for any active ETF with an available underlying mutual fund strategy. Now, for the active ETFs with no mutual fund sibling? I’m not sure how they’d stay in check.

I’ve never tried to create or redeem an ETF., preferably someone who knows more about this process, specifically with regards to fixed income products will provide more details.

As to StL, Bloomberg has the holdings from a filing on 4/12/2012. By my count they list 232 holdings. It could be that they simply just include the biggest positions without derivatives in the ETF. I have no real idea, but I would think 232 would be doable. I’m not sure how often the basket changes and when they make their trades, but presumably they have a specific basket that they are willing to create or redeem ETFs. If I were Pimco, I would want to update the basket as often as I change the portfolio. That way the market bears the risk, not the fund manager.

Bchad you’re right. Active ETF is no more than a glamourized version of a regular ETF with the main difference being that it is the manager who selects the index in advance every month or so…

@jmh - I’m not familiar with the regulations around when ETFs must post holdings info. In the mutual fund world, we can’t post holdings info until 30 days have passed.

It makes sense that the ETF holds fewer securities since it’s at about $450mm in AUM compared to $250B for the mutual fund.

If ETFs are more transparent, that’s an interesting risk to the asset manager of the mutual fund version…having to give up their holdings info in near real time removes a competitive advantage. It wouldn’t be hard to duplicate the Total Return process with far fewer securities. Get the same sector and duration exposure and you’re pretty much there.

One has to be an Approved Party to arb an ETF, which generally means you have to be large enough to trade 25,000 to 200,000 share block sizes. There may be other requirements too.

You guys are basically confirming what I was thinking. I just thought that maybe I was missing something. It seems that marketing active mutual fund strategies in ETF form is really just trying to leverage the popularity of ETFs in order to keep market share - on the idea of “better 50 bps of something in an ETF than 150 bps of nothing in our mutual fund.”

Think that last post got it right. I recall an article or interview with Bill Gross essentially saying just that, getting on the ETF band wagon.