BOSTON (TheStreet) -- The debate over exchange traded funds and mutual funds is heating up after the stock-market rally pushed through April. ETFs are cheap, index-tracking securities. Also, as ETFs proliferate, they're able to track increasingly exotic securities and geographic regions, even with leverage. Low cost, transparency and liquidity have won ETFs advocates. However, mutual fund managers, with years of experience, also add value.

Bill Gross

But, research indicates that many mutual fund managers are "closet indexers" who simply track benchmarks and, worse, the majority of mutual funds fail to outperform ETFs, despite higher fees. Some investors and researchers dispute those assertions. Nevertheless, what's more important than choosing the correct mutual fund, or mutual fund strategy, is picking a capable manager. If individual investors are weighing a decision between a passive ETF and an actively managed mutual fund, picking the mutual fund is the riskier choice. But, selecting a top manager with tactical flexibility may prove the best option, provided that the manager, when exercising discretion, has proven to have accurate views of the market.

A manager who fits that description is Bill Gross, the bond mutual fund king at

PIMCO

. Gross has taken aggressive stances on particular bond-market sectors, and, in that respect, more closely resembles a hedge fund manager than an everyday mutual fund manager. The typical mutual fund manager is interested in charging a fee on assets and retaining his or her high-paying job, not taking calculated risks to outperform the market. As the saying goes, it's warmest in the middle of the herd. But, if an investor is interested in growing wealth and has a tolerance for contrarianism, Gross is an ideal and tactically proficient manager who's more interested in besting his peers than playing it safe.

The

Total Return Fund

(PTTAX) - Get Report

is the largest mutual fund in the world, deterring many an investor who is wary of putting money in a behemoth. Many are under the impression that large mutual funds tend to underperform. This is a logical assumption. As a firm amplifies its investable assets, the focus inevitably turns away from investing and toward bureaucracy. After all, from a business perspective, once a company has significant assets, the priority of retaining clients eclipses that of attracting new ones, leading to conservatism. In addition, it's generally more challenging to manage large pools of money because when an undervalued asset is identified, buying it in bulk causes a price rise, thus limiting upside. However, in the ultra-liquid $100 trillion global bond market, Total Return, which now has an eye-popping $240 billion of assets, is a drop in the fixed-income bucket.

In addition, the burgeoning emerging capital markets are providing tremendous opportunity to invest in the debt of fast-growth economies, which currently offers attractive yields in appreciating currencies as the U.S. dollar weakens. Gross, who is shorting U.S. Treasury bonds, is focusing his attention overseas to the sovereign and corporate debt of credit-worthy, fiscally-prudent nations. His Total Return also has a sizable position in mortgage-backed securities and U.S. corporate debt. When it comes to deciding between an ETF and mutual fund, Bill Gross enthusiasts may soon enjoy both options. An actively managed Total Return ETF released a prospectus to the Securities and Exchange Commission last week.

Gross manages nearly a third of PIMCO's more than $1.2 trillion. In addition to running Total Return, which receives a "buy" rating from

TheStreet Ratings

and a superlative five-star ranking from

Morningstar

(MORN) - Get Report

, Gross actively manages a number of other funds and advises other managers in his role as chief investment officer, a duty he shares with CEO Mohamed El-Erian. Despite numerous responsibilities, there's no indication that Gross is losing his edge. PIMCO, considered the foremost authority on

bond investing

, is gradually adding equity funds.

PIMCO initiated

PIMCO Pathfinder

(PATHX)

, an emerging market value stock fund, last year. Run by newcomers Anne Gudefin and Charles Lahr, Pathfinder has returned 10% in the past 12 months. With holdings ranging from the

SPDR Gold Trust

(GLD) - Get Report

to

British American Tobacco

(BATS)

, this so-called global fund has failed to impress so far. Although one year is a short-horizon to judge performance, it is best for individuals to invest with PIMCO's core competency in mind -- debt analysis. Thus, gaining exposure to the expertise of Gross, who has generated alpha (risk-adjusted outperformance) every year at the helm of Total Return, is the way to go. Total Return has generated an annualized return of 8.4% over a five-year span, outstanding for a bond fund.

Gross has iterated the thinking behind Total Return's short Treasury position

The fund is significantly underweight its benchmark's Treasury holdings. In Gross's April missive, titled

Skunked

, he cited the U.S. government's $65 trillion of unfunded entitlement liabilities, which is significantly more disconcerting than the $9.1 trillion of Treasury debt. While recognizing that the Federal Reserve may continue to hold Treasury yields at artificially low levels, Gross has decided to shirk the old adage of "don't fight the Fed" and adopt a longer-term outlook, namely, the bond vigilantes will eventually recognize and price in our fiscal mismatch, and Treasury prices will naturally suffer.

Gross's insight came a few weeks before

Standard & Poor's

cut the outlook for Treasury debt to "negative" from "stable" due to politicians' inability to reform fiscal profligacy. While Total Return now offers investors a degree of insulation from our domestic debt woes, several of Gross's other products go unnoticed. For example, in a

Barron's Roundtable

, Gross plugged his closed-end fund, which is similar to an ETF as both trade on a public exchange, but different in that a CEF has a finite number of shares. Gross runs two high-yielding CEFs:

PIMCO Income Strategy Fund

(PFL) - Get Report

and

PIMCO Corporate Income Fund

(PCN) - Get Report

. These are top-performing investments that get little attention from the financial media.

Ostensibly, Income Strategy yields an eye-catching 7.3%. But, when factoring in annual special distributions, it yields closer to 10%. The fund has appreciated 9.6% in the past 12 months. Similarly, Corporate Income yields nearly 10% when factoring its annual distribution and has advanced 14% in 12 months. However, both of these funds use leverage and trade at premiums to net asset value per share. In other words, the shares sell at a premium to their intrinsic value

a common flaw of closed-end funds. They are also highly sensitive to interest rates, but the Fed's reiteration of low rates for "an extended period" should assuage the risk of near-term hikes.

Both of these closed-end funds pay monthly, not quarterly, distributions, making them especially attractive to income-oriented investors. Closed-end funds are outstanding vehicles, particularly for tax-deferred or tax-free investment accounts, such as Roth IRAs, because their leverage produces outstanding yields. However, the closed-end fund market is dominated by individual investors, who often have knee-jerk reactions to economic events, causing volatility amid negative news flow. Still, these CEFs are compelling ways to capitalize on the fixed-income intellect of Bill Gross. Investors considering Total Return should research Gross's closed-end funds.

-- Written by Jake Lynch in Boston.

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