ETFs: When to Trade Pimco's TRXT

NEW YORK ( ETF Digest) -- Fixed income guru Bill Gross made waves on Thursday with the launch of his PIMCO Total Return ETF (TRXT). Unlike most ETFs which seek to replicate the returns of a given index, TRXT is structured as an actively managed fund.

Actively managed funds differ from other ETFs in two important ways: they have higher expense ratios (compare TRXT's expense ratio of 0.59% after all fees to the popular SPY's 0.09%) and are less transparent. This isn't to say that information on an actively managed ETF's holdings are unavailable to the public; far from it -- TRXT will reveal its holdings daily. Rather, it is not linked to any specific benchmark, and so investors must trust completely in Bill Gross's investment wisdom.

Bill Gross

Even so, the evidence suggests that their trust would not be misplaced. Bill Gross is a star of the mutual fund world, and currently manages the PIMCO Total Return Fund ( PTTRX), the largest mutual fund in the world in terms of assets under management, totaling $250.47 billion as of Feb. 3.

As of now, actively managed ETFs have yet to catch on in a big way. While the amount of money invested in ETFs has skyrocketed over the past few years, and now stands at around $1.3 trillion, actively managed ETFs like the one PIMCO launched today are actually quite uncommon and account for barely 0.5% of that -- about $5 billion.

ETF watchers are split on whether Gross's entry into the sector could spark greater investor interest in actively managed ETFs. That remains to be seen, but it's clear that, at least on the first day, there was a healthy amount of interest, with more than 500k shares of TRXT trading hands.

Still, the fund faces some disadvantages. Its investment objective is to match PTTRX's (PIMCO Total Return Fund) performance, but while a mutual fund is free to use derivatives (and PTTRX makes extensive use of them), TRXT explicitly states in its fund description that it "may not use options, futures, or swaps."

Furthermore, unlike mutual funds, ETFs must disclose their holdings every day, making surreptitious moves much more difficult. With this in mind, it's hard to see how Gross will be able to provide the same performance in his ETF as he does with his mutual fund -- the two investment vehicles are subject to different rules.

Also, they don't call Bill Gross "the bond daddy" for nothing. His ETF will deal primarily in two-year investment grade bonds which are currently providing yields of less than 2%. Subtract the relatively high expense ratio of 0.55% (0.59% after all fees) from those modest bond yields, and it's hard to see how this ETF is going to make you very much money.

Investors should keep this ETF in mind just in case the bond yield curve inverts, and short-term interest rates rise. Then TRXT would be a much more sensible investment.

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