Bet on the Best Ideas of Bill Gross

Here are ETF Base we’ve covered everything about interest rates, to which dividend ETF is best positioned for rising rates, or how to protect use target maturity bond funds. We’ve even uncovered some rockstar junk bond managers.

But what we haven’t discussed is whether or not it makes sense to align with Bill Gross in his Pimco Total Return Bond ETF (BOND).

Let’s look at the ETF and how it differs from the mutual fund.

Should you bet on Bill Gross?

Bill Gross is the bond market. His Total Return fund practically made PIMCO what it is today, as the mutual fund holds a whopping $268 billion in assets. No other mutual fund even comes close. In fact, Warren Buffett’s Berkshire Hathaway (BRK-A) is the only “fund” larger than Gross’s fixed income product.

Gross is also the portfolio manager of the popular PIMCO Total Return ETF (BOND), an ETF built around the same foundation as the massive mutual fund.

Despite their similarities, the ETF beats the PIMCO Total Return Institutional (PTTRX) mutual fund, however. With only $4.29 billion in assets, the ETF provides higher returns because it likely contains Gross’s best ideas.

The mutual fund holds more than 20,000 different issues. The ETF, however, holds just 789.

The ETF is an actively-managed fund, not a closed-end fund, so it has to hold the most available securities to allow for creation and redemption. Given its smaller asset base, it also has to concentrate into each position. Even a higher fee for the ETF (.55% vs. .46% for institutional mutual fund shares) hasn’t put a dent in returns for investors.

Active management shows in the portfolio. Gross invests very differently than other fund managers in his category. Morningstar reports a very different mix of maturities vs. the category average:

BOND vs. Category
1 to 3 Years 36.02% — 10.78%
3 to 5 Years 13.46% — 25.33%
5 to 7 Years 7.52% — 8.36%
7 to 10 Years 10.65% — 13.79%

Gross believes that rates are headed higher, and he’s positioned the portfolio for such an event, investing more than a third of the portfolio in short-term securities that have left his funds to deep, broad decline in fixed-income portfolios in 2013. BOND is only off 2.4% this year due to its bias toward shorter maturities.

Free money?

The largest mutual fund in the world couldn’t reach that stature without wide distribution in retirement accounts. The Total Return Bond Fund is a leading choice in many 401ks. However, investors who opt for the mutual fund in lieu of the ETF are missing out on total returns. The ETF should beat the mutual fund with ease so long as it has fewer assets under management.

As the ETF grows, it will slowly look more like the popular mutual fund. Greater diversification will depress returns and increase correlation between the two very similar funds.

For now, though, investors willing to own the mutual fund should make the move. The ETF is more nimble and doesn’t have to diversify to the same extent as the mutual fund.

Go with Gross?

Bill Gross has made a few errors as of late. He famously shorted Treasuries right before one of their biggest, post-financial crisis rallies. That position was later covered.

However, PIMCO may have much better insight into the markets than it lets on. An article at Reformed Broker notes the company’s incredible trade timing: “Historically, before a really big move in rates, Pimco comes in and pays any price for vol – it’s as if they’re in the same room as the Fed.”

Are they in the same room as the Fed? Of course not, but anyone running a fund in the hundreds of billions of dollars spanning 20,000 individual securities likely has a lot more insight into the debt market than other fund managers.

At .55% per year, the Total Return ETF looks like a solid wager for anyone seeking exposure to intermediate term bonds. At a price of 55 basis points, investors can be comfortable knowing their assets are in the hands of the world’s best bond investor, who gives fair treatment to his ETF investors. It’s a small price to pay for Bill Gross’s best ideas. The 9 basis point fee differential is certainly worth the added expense.

Disclosure: No position in any ticker mentioned here.