Bond woes toppling Total Return ETF

When Bill Gross announced the launch of the exchange-traded version of the Pimco Total Return Fund, he had his sights set on it becoming the biggest ETF in the world. Thanks to interest rate blues, it isn't even the biggest ETF at his company now. Last week, the $4.09 billion Pimco Enhanced Short Maturity ETF (MINT), an ultrashort-bond ETF, surpassed the $4.06 billion Pimco Total Return ETF (BOND) to become the biggest actively managed ETF as investors clamored for the safety of bonds less sensitive to rising long-term interest rates. Before the Total Return ETF's March 2012 launch, Mr. Gross predicted that it would grow to be bigger than the then-$95 billion SPDR S&P 500 ETF (SPY), the largest ETF. “We're working with very large expectations here,” he said during a January 2012 ETF conference. Of course, that was before rising rates started causing headaches across the bond universe. Since long-term rates began to rise in May, investors have pulled out $858 million from the Total Return ETF and added $1.4 billion to the Enhanced Short Maturity ETF, according to IndexUniverse LLC. “With massively rising interest rates, even a good bond manager is going to have trouble creating positive performance in this environment,” said Timothy Strauts, an analyst at Morningstar Inc. The Pimco Total Return ETF has lost 3.23% this year. Over the same time period, the Enhanced Short Duration ETF is basically flat. With the 10-year Treasury bond's interest rate hovering near 3%, Mr. Gross himself advocated shorter bond durations last Thursday in his most recent investment outlook. The $800-plus million that has been pulled from the Total Return ETF is just a drop in the bucket compared with the $26 billion that investors have pulled from the Pimco Total Return mutual fund (PTTAX) since May, according to Morningstar. Between the outflows and losses from rising rates, the $251 billion mutual fund has shed $41 billion, or 14% of its assets, over the past four months. Mr. Gross isn't alone in seeing investors flee bond funds.

ACROSS THE BOARD

Investors pulled about $60 billion from U.S. bond funds in June, the biggest monthly redemptions in records going back to 1961, according to the Investment Company Institute. Altogether, $102 billion has been pulled from bond funds since May 31, according to the ICI. It hasn't helped Mr. Gross that the Total Return mutual fund had lost 4.38% year-to-date through Sept. 4, worse than 90% of similar bond funds, according to Morningstar Inc. The Total Return ETF has done better. It's 3.23% year-to-date loss ranks in the top half of intermediate-term-bond funds. [email protected] Twitter: @jasonkephart