"We've had two to three years of internal discussions," Gross said. "The challenge is obvious. We could fall flat on our face or we could roar like a lion in a year or two or three and become the largest ETF."

Pimco already oversees the industry's biggest active ETF, the $1.4 billion Pimco Enhanced Short Maturity Strategy, which began in November 2009.

The Pimco Total Return ETF will be similar in strategy to Gross's $250 billion Total Return Fund. Pimco, led by Chief Executive Officer Mohamed El-Erian, in 2009 began a push into ETFs as part of the firm's move to diversify its products.

Unlike the Total Return mutual fund, which uses a combination of options, futures and swap agreements, Gross's ETF can't invest in such derivatives. The SEC said in March 2010 it wouldn't approve new ETFs that make significant use of derivatives, pending a review of the practice that is continuing. Should the SEC lift the freeze, the Total Return ETF would invest in derivatives, Pimco said in its filing last year.

Use Of Derivatives

Gross said the inability to invest in futures and swaps is less of a handicap as they've become more expensive to buy and the spreads have shrunk since he started the total return strategy in 1987.

"Our performance has been due to secular positioning in terms of duration and risk spreads rather than the use of derivatives over the past few years," he said.

The institutional share class of the Total Return mutual fund, which requires a minimum investment of $1 million outside of retirement accounts that make it available, has an expense ratio of 0.46 percent, or $46 a year for each $10,000 invested. The fund's most widely used retail share classes charge fees ranging from 0.75 percent to 0.85 percent. The Total Return ETF will charge fees of 0.55 percent, Pimco said in a July filing with the SEC.

Rebounding Performance

The Total Return Fund has advanced at an annual rate of 8.4 percent in the past five years, beating 98 percent of rivals, according to data compiled by Bloomberg. Last year, the fund trailed 69 percent of rivals after Gross missed a rally in Treasuries. The fund has since rebounded, rising 2.9 percent this year to beat 96 percent of the competition.

Investors should embrace a defensive strategy that includes emphasizing income, de-emphasizing derivative structures that are fully valued and being willing to accept returns lower than historical averages, Gross said in a commentary posted on Pimco's website this week.

Pimco may appeal to investors now because bond management "could get tricky" and returns could decline as interest rates rise from historic lows, IndexUniverse.com's Hougan said. "You're entrusting Gross to navigate what could be a reversal of a 30-year decline in rates," he said.