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Pimco Total Return ETF: Same Thing, Only Different

Pimco has filed with regulators to offer its celebrated Pimco Total Return mutual fund (PTRRX) as an exchange-traded fund. The proposed ETF, called the Pimco Total Return Exchange Traded Fund, is expected to be listed under the symbol TRXT.

The news was welcomed by Robert Goldsborough, an ETF analyst at Morningstar, in a note to investors:

"Morningstar long has called for Pimco and its guru Bill Gross - who has managed PTRRX since inception and who, along with his team, received Morningstar's Fixed-Income Manager of the Year honors in 1998, 2000 and 2007 - to create an ETF version of the massive Pimco Total Return."
The Pimco ETF would offer investors the same advantages that ETFs do generally, Goldsborough goes on to say: "We have advocated for an actively managed ETF version of PTRRX under the argument that the fees for retail investors could be lower, the tax efficiency could be higher and the fund distribution channel is open to all."
He dismisses the impact of one potential drawback of the ETF - the fact that it would have to disclose its portfolio positions daily. He doesn't expect that to be a problem because the fund is so large that the bond market already has a good idea of Gross's wheelings and dealings.

Goldsborough highlights one aspect of the ETF that could set it apart in a substantive way from the mutual fund. Despite what the ETF's not-too-imaginative name may suggest, it will not be a clone of the mutual fund:

"The filing does alert investors to the fact that the proposed ETF's investments and results 'are not expected to be the same as those made by other funds for which Pimco acts as an investment adviser, including funds with names, investment objectives and policies similar to' the proposed ETF. Put another way, Pimco is telling investors that the proposed ETF may be managed differently or trade after the mutual fund makes its trades. As a result, those investors who want to jump ship from PTRRX in search of a possibly lower fee from the ETF version may see different results. This ETF is not a separate share class of the existing mutual fund with a similar name."

Goldsborough observes that the regulatory filing "casts a broad net," seeking approval to diversify greatly based on geography and credit quality. The ETF, like the mutual fund, would concentrate on domestic, investment-grade instruments, but it would be able to invest up to 10 percent of its assets in high-yield securities and 30 percent in foreign-denominated bonds. Having wide latitude would allow the ETF to limit its exposure to Treasury instruments, something that Goldsborough notes Gross has been eager to do. Goldsborough favors that tactic - and the ETF once it is approved and listed - due not so much to his opinion about Treasuries as to his opinion about Gross:

"Gross and his team have been frustrated by how low Treasury yields are, and he believes that the Fed's plan to stop buying bonds in June may well cause yields to rise. As such, Gross and his team have been focusing instead on corporate bonds, high-grade non-U.S. debt, emerging-markets debt and municipal bonds, all of which they believe represent less risk than holding expensive and interest-rate-sensitive Treasuries. It's a dramatic deviation from his benchmark but one that investors should feel confident in, given Gross's impressive track record. We would expect his team to apply that same thought process to this proposed ETF."

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