Active ETF Blockbuster: PIMCO Files For Total Return Fund

by on April 21, 2011 | ETFs Mentioned:

PIMCO, the world’s largest bond manager, has ETF investors salivating over the prospect of an ETF version of the ultra-popular Total Return Fund. In a recent SEC filing, PIMCO laid the groundwork to launch an ETF version of the world’s largest bond fund. The PIMCO Total Return Exchange-Traded Fund would be an actively managed product, seeking “maximum total return, consistent with preservation of capital and prudent investment management.”

The proposed fund would maintain significant flexibility to shift exposure across various asset classes and durations, a feature that is responsible for the impressive track record rung up by the mutual fund version. At least 65% of the fund would be invested in a portfolio of fixed income securities that could include bonds, debt securities and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. PIMCO has made headlines in recent weeks following reports that the Total Return Fund had dumped U.S. Treasuries from its portfolio.

The proposed ETF would have the flexibility to allocate as much as 10% of the portfolio to junk bonds. One noteworthy item from the filing relates to securities that the proposed ETF would not consider:

The PIMCO Total Return Exchange-Traded Fund will not invest in options contracts, futures contracts or swap agreements, in accordance with the Trust’s current SEC exemptive relief. Should the SEC modify the Trust’s current exemptive relief or otherwise issue guidance or relief such that the Fund may utilize one or more of these derivative instruments in reliance thereon, the PIMCO Total Return Exchange-Traded Fund intends to revise this policy accordingly.

The SEC is engaged in a review of the use of derivatives in mutual funds and ETFs that has stretched on for more than a year. During that time, approvals of so called exemptive relief applications have ground to a halt, and many would-be issuers have modified filings to explicitly exclude the use of derivatives.

World’s Largest Bond Fund

PIMCO’s Total Return Fund (PTTRX) was launched in 1987 and now has more than $235 billion in assets. There are eight different share classes of that fund available, with various management fees, sales charges, and other fees:

  • Class A (PTTAX): Annual Operating Expenses of 0.90%
  • Class Admin (PTRAX): Annual Operating Expenses of 0.72%
  • Class B (PTTBX): Annual Operating Expenses of 1.66%
  • Class C (PTTCX): Annual Operating Expenses of 1.66%
  • Class D (PTTDX): Annual Operating Expenses of 0.76%
  • Institutional Class (PTTRX): Annual Operating Expenses of 0.47%
  • Class P (PTTPX): Annual Operating Expenses of 0.57%
  • Class R (PTRRX): Annual Operating Expenses of 1.16%

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No expenses or ticker symbol were revealed for the proposed Total Return ETF.

PIMCO is a relative newcomer to the ETF space, but has been successful in building meaningful asset bases in both actively-managed and passively indexed products. Currently, the PIMCO ETF lineup consists of 13 ETFs, including four active funds:

  • Enhanced Short Maturity Strategy Fund (MINT)
  • Short Term Municipal Bond Strategy Fund (SMMU)
  • Intermediate Municipal Bond Strategy Fund (MUNI)
  • Build America Bond Strategy Fund (BABZ)

Those four ETFs have aggregates assets of about $1.1 billion, but more than 90% of that total is attributable to MINT. That fund is essentially a money market alternative, making it appealing to investors looking for a safe place to park cash or scale back on exposure to risky assets.

Disclosure: No positions at time of writing.