BND Vanguard Total Bond Market

At the beginning of March, the ETF industry experienced a landmark event; the launch of the exchange-traded version of the PIMCO Total Return Fund, now with the ticker BOND. The new product suggested to many that the ETF industry had arrived and that major mutual fund managers were finally seeing the promise and growth of the ETF space.

The fund has also seen an incredible amount of interest from investors in just its first month on the market. The ETF has already amassed more than $340 million in assets and sees nearly 200,000 shares a day change hands (also read The Best Bond ETF You Have Never Heard Of).

All of this comes despite the fund charging more than what investors see in some of the other classes of the fund as well as other index based bond ETFs. In fact, with an expense ratio of 55 basis points, is nearly five times as pricey as low cost options targeting the space such as BND or SCHZ.

Additionally, there is some concern that BOND will not be able to match its mutual fund counterparts due to a variety of reasons. First, there are worries that front-running—since the ETF has to update holdings on a daily basis-- could be an issue as small traders can move easier into positions than the behemoth total return fund. Also, BOND isn’t allowed to use derivative securities in its portfolio, a technique that is often a hallmark of Bill Gross’ strategy in the mutual fund versions.

However, despite these very real concerns, the total return ETF has thrived so far in its first month of trading. BOND has actually widely outperformed its cheaper PIMCO Total Return II Institutional Investor Fund (PMBIX) by about 1.1% in the past month while the PIMCO Total Return II P Fund (PTTRX) also underperformed BOND by a similar margin (also see Time To Get Regional With Bond ETFs).

This suggests that at least initially, BOND has been able to live up to the hype and actually provide investors with a better investing experience than the mutual fund counterparts. While there is no telling if this trend will continue, it is encouraging none the less, especially for retail investors who can save a few basis points by switching to the PIMCO Total Return ETF.

The quality performance could also spur more mutual fund companies to create similar alternative ETFs for their fund lineups. After all, if BOND can gain so much in assets and still perform quite well despite the lack of complex derivatives, many are likely to believe that they can do the same as well (see more at the Zacks ETF Center).

Yet although BOND has outperformed so far, investors should note that there are a decent amount of differences between the ETF and the mutual fund versions of the product, at least when looking at the most recent info available. In fact, the ETF has a slightly lower effective duration of 5.28 years compared to a 5.68 year reading for the mutual fund.

Beyond this interest rate sensitivity difference, there are also a few holdings differences as well. According to the most recent info on the PIMCO site, emerging market bonds make up nearly 10% of the portfolio in PTTRX while they account for just 2% of the ETF. Additionally, mortgage securities make up 72% of the ETF compared to 52% in the fund while Treasury bonds account for 56% of BOND compared to about 40% for the mutual fund counterpart (see ETFs vs. Mutual Funds).

This suggests that there are still some key differences between the mutual funds and ETF versions of the product, although investors can’t sure how severe the differences are thanks to less stringent disclosure requirements inherent in mutual funds.

Nevertheless, while BOND and PTTRX will generally be similar, a bit of performance deviation will be likely, especially given the dissimilar holdings in the two products. So far this has been in BOND’s favor, but there is no telling whether this trend will continue in this increasingly popular total return ETF from bond giant PIMCO.

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