“It’s a proof point that fixed-income ETFs and ETFs in general are no longer niche investment vehicles,” David Mazza, head of ETF investment strategy in the Americas at State Street Global Advisors in Boston, said in a telephone interview. “They now can be used and embraced by the largest institutional investors in the world.”
Unlike Pimco’s mutual fund, the ETF is prohibited from using certain derivatives, such as futures, options and swap agreements. In all other respects, the firm says, it seeks to follow a similar investment strategy, with at least 65 percent of its assets held as fixed-income securities and the same targeted allocations to different credit markets.
‘First Pick’
Gross, who helped found Pimco in 1971 and now serves as co- chief investment officer, named the ETF as his “first pick” as he selected three bond exchange-traded funds to be used as “bond substitutes.”
“I manage it on a daily basis,” he said at a Jan. 14 roundtable in New York hosted by Barron’s. “It has been a huge success story.”
Gross, who is often referred to in the media as “the bond king,” also runs the Total Return Fund, which has advanced an annualized 7.9 percent over the past five years to beat 93 percent of peers.
The ETF charges 55 basis points in annual expenses, according to fund documents. That compares with 46 basis points for the traditional fund’s institutional shares, which generally are used by advisers.
Less Liquidity
At the ETF’s inception in February 2012, Gross said in an interview that “if you already own the Total Return Fund with a lower fee, it’s hard to see why you’d want to go into the Total Return ETF with a higher fee other than for more liquidity.”
While the amount of dollar-denominated corporate bonds outstanding has surged 11 percent in the year ended March 31 to $5.2 trillion, the average volume of the notes traded daily rose 2 percent to $19.2 billion, according to Trace and Bloomberg data. Corporate bond sales in the U.S. reached a record $1.475 trillion in 2012.