Bill Gross' new ETF will be tough to mimic

The bond guru will be more transparent, but investors hoping to use his fund as a blueprint will be out of luck.

By TheStreet Staff Jul 12, 2011 10:35AM

By Frank Byrt, TheStreet


Followers of bond fund maven Bill Gross of Pimco will be able to get a gander at his trading strategy once the firm launches its first exchange-traded fund later this year. But that doesn't mean investors can replicate Gross' big wins on their own.


That's because of a regulatory wrinkle that will preclude do-it-yourselfers from matching his moves trade for trade, at least for now.


Gross has built a reputation as a brilliant manager of the world's largest mutual fund, the $253 billion Pimco Total Return Fund (PTTAX), which has a five-year average annual return of 8.5%, more than twice that of the S&P 500 Index.


An ETF, which trades throughout the day like a stock, discloses its portfolio holdings on a more regular basis than a mutual fund to provide greater transparency, per Securities and Exchange Commission regulations. And that got some investors excited that they'd be able to match Gross' moves without buying the ETF.

But his Pimco Total Return mutual fund uses derivatives to massage returns, something the new ETF won't be able to do. This means the best a camp follower will be able to do is take cues from the direction of his trades, which can be market moving given the size of the assets he and his management team oversees.


The SEC is reviewing the use of derivatives such as futures, options and swaps agreements so investors will be fully aware of the degree of risk involved in such practices. It may decide derivatives are too risky for investors in the rapidly moving funds, but it hasn't given a deadline on when it will decide.


And therein lies the rub for investors seeking to match Gross' strategy by reviewing his portfolio moves at the ETF.


"It would not have an identical strategy," given the absence of derivatives, said Todd Rosenbluth, a mutual fund industry analyst for Standard & Poor's.


If the SEC OKs the practice, the Total Return ETF would invest in derivatives, Pimco said in an SEC filing.


Nevertheless, the Gross-managed ETF is likely to gather assets quickly upon its launch. The reason: Analyst Eric Jacobson of fund-tracking firm Morningstar says, "Manager Bill Gross and Pimco's team are among the best in the business."

At the Total Return Fund, "Gross couples Pimco's long-term macroeconomic outlook with its take on short-term cyclical factors to determine this fund's sector weightings and duration (a measure of interest-rate sensitivity)," Jacobson writes in a research note.


Rosenbluth said Pimco has a "grand brand" that will pique investor interest in an already hot investment tool. "Investors are flocking to existing ETFs, and ETF providers are launching new ones. There are 1,000 ETF products that are available now and over 100 have been launched this year, so there continues to be demand from end users and new supply."


More than 70% of ETFs are equity funds, many tied to indexes, while about 14% are tied to fixed-income indexes, Rosenbluth said.


The biggest ETF is the SPDR S&P 500 (SPY), with $98 billion in assets. Its performance tracks the Standard & Poor's 500 Index ($INX).


There is more than $1 trillion in ETFs today, up about 30% in the past year. But only a $5 billion sliver of that is in actively managed ETFs, according to Morningstar.


The Pimco Total Return Exchange-Traded Fund will trade under the ticker symbol TRXT. It is expected to launch within a few months. The fund will charge annual fees of 0.55%.


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