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PIMCO Total Return ETF Ends Quiet Period

With an expense ratio of 0.55%, this actively managed ETF could compete.

Tim Strauts, 07/07/2011

New information was released today about the PIMCO Total Return ETF, which will likely be launched in a few months. Normally we don't write about exchange-traded funds while they are still in registration, but PIMCO's filing is interesting news for both the industry and investors in the world's largest mutual fund. There is more than $1.1 trillion in ETFs today, but only a $5 billion sliver of that is in actively managed ETFs. There are many reasons for the slow adoption rate of active ETFs, but one of the biggest is the lack of well-known managers. This won't be an issue, as Bill Gross will be lead portfolio manager, and the fund will have the same investment strategy as the largest mutual fund in the world, PIMCO Total Return PTTRX.

The ETF's ticker will be TRXT, and it will carry an expense ratio of 0.55%. For comparison, the institutional share class of the mutual fund charges 0.46%, so we don't think there is a compelling cost-based reason to switch out of this particular share class. The more compelling opportunity is for individual investors and fee-based advisors who may only have access to more-expensive share classes like PIMCO Total Return PTTAX, which carries an expense ratio of 0.85%. A 0.30% advantage for the ETF is compelling, especially in a low interest-rate environment.

While the investment strategy for the ETF and the mutual fund will be the same, they are different funds with their own unique holdings. One of the key differences between the funds will be the use of derivatives. The ETF will not hold futures, swaps, or options, which are used extensively in the Total Return mutual fund. This may limit the tactics that can be employed in the ETF but will make it the more traditional fixed-income vehicle.

With more than $240 billion invested in the Total Return fund and the influence Bill Gross wields, PIMCO has the ability to move the fixed-income markets with its portfolio changes. For the first time, investors will be able to see PIMCO's macroeconomic views in real time through the holdings of the Total Return ETF. When changes are made to the portfolio, PIMCO uses a sophisticated trade allocation process to allocate shares of securities to the funds on a pro-rata basis. This means that the ETF will get new positions at the same time as the mutual fund.

In 2010, PTTRX distributed about 5% of assets as a capital gain at the end of the year. Investors in taxable accounts may be able to improve their tax efficiency by investing in the ETF because PIMCO will be able to use the creation and redemption process to limit capital gains distributions.

One negative is that the ETF may be less desirable for investors in the asset-accumulation phase of their lives. Many ETFs do not offer the option of automatic reinvestments of dividends and interest income like their mutual fund counterparts. If interest is not reinvested, your returns will differ from the fund's total return used in marketing materials.



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