Updated Saturday, August 29, 2015 as of 5:01 PM ET

Pimco ETF Trounces Flagship Attracting Less Cash: Credit Markets

(Bloomberg) Pacific Investment Management Co.’s 13-month-old exchange-traded fund is attracting more cash than the firm’s flagship Total Return mutual fund as investors join Bill Gross in preferring ETFs for bond investing.


About $263 million was funneled into Pimco’s $4.3 billion Total Return ETF in March, compared with $32 million for the $289 billion eponymous mutual fund, the lowest monthly volume for the world’s biggest bond fund since December 2011, according to data compiled by Bloomberg. The ETF returned 1.2 percent in the first quarter versus 0.6 percent for the 25-year-old mutual fund, the world’s largest.


The outperformance underscores the rising influence of ETFs as investors seek faster ways to slip in and out of the bond market for an edge with returns dwindling after average annual gains of 6.3 percent in the past four years. After following BlackRock Inc. and Vanguard Group Inc. into fixed-income exchange-traded products, Newport Beach, California-based Pimco is gaining ground as the industry swells to $321.2 billion.


“People like what ETFs offer in terms of intraday liquidity, cost efficiency and transparency,” said Deborah Fuhr, the former ETF research head at BlackRock who helped found London-based research firm ETFGI last year. “Bill Gross is a portfolio manager who is well-known and respected. The performance of the ETF, which has done better than the mutual fund, is an important part of the story.”


‘On Board’


Mark Porterfield, a Pimco spokesman, said executives weren’t available to be interviewed this week on the performance of the firm’s two funds. He said late today that the actual inflow into the Total Return mutual fund was $732 million in March.


The Total Return ETF, selected by Pimco co-founder Gross in January as his top pick for a bond fund this year, amassed $4.2 billion of deposits in the 12 months ended in February, according to ETFGI. That’s almost 10 percent of the $43.1 billion of flows into the 166 fixed-income exchange-traded funds and products in the U.S.


More than a decade after BlackRock created the first fixed- income ETF, investors from hedge funds to retirees are increasingly turning to the products, which have shares that trade like stocks on exchanges, as bond-trading volumes fail to keep pace with record issuance.


“ETFs are the future of asset management,” said Timothy Strauts, an ETF analyst at Morningstar Inc. in Chicago. “Gross being on board with ETFs, I see that as him seeing the light.”


Default Swaps


Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 1.3 basis point to a mid-price of 88 basis points as of 6:18 p.m. in New York, according to prices compiled by Bloomberg.

The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell 0.9 basis point to 15.38 basis points. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.


ETFs ‘Embraced’


Bonds of Charlotte, North Carolina-based Bank of America Corp. were the most actively traded dollar-denominated corporate securities by dealers today, accounting for 3.9 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.


Investors are turning to ETFs to maneuver quickly in a market that’s losing 0.07 percent this year on the Bank of America Merrill Lynch U.S. Broad Market index compared with 0.46 percent gains in the same period of 2012 as the Federal Reserve holds its benchmark interest rate at close to zero percent for a fifth year.


Pimco’s Total Return ETF has returned 13.4 percent since it started trading on March 1, 2012, more than 5 percentage points more than the 8.3 percent gain for its mutual fund. With lower volatility, the ETF’s risk-adjusted returns of 4.6 percent compare with 2.3 percent for the mutual fund, Bloomberg data show.


‘First Pick’


“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.”


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