Coming: ETF Version of World's Biggest Mutual Fund

PIMCO expects Total Return ETF investors will pay an expense ratio of 0.55 percent, or $5.50 a year for every $1,000 invested. That's the ongoing charge for operations, expressed as a percentage of assets. That's less costly than the 0.90 percent that mutual fund investors pay. Plus mutual fund investors can pay a sales load of as much as 3.75 percent upfront.

Despite the ETF's low costs, there are less expensive ways to invest in Total Return. Many investors owning the fund in a 401(k) account are charged less. That's because the plans are managed by institutional investors that pay 0.46 percent. 

Active management

The Total Return ETF will differ significantly from several less-expensive bond funds because it will be managed by Gross with the help of PIMCO's analysts, rather than passively track an index. Actively managed ETFs are typically more costly than index funds and they represent just 1 percent of all ETF assets. They haven't gained a significant foothold because they add complexity to traditionally index-oriented ETFs.

There's another potential pitfall. ETF are required to disclose their investments each day. This could hamper the ability of a manager like Gross to beat the market. The frequent disclosures create the risk that his trades could be mimicked by an opportunistic rival. By comparison, mutual funds disclose holdings monthly, or even quarterly.

However, there's less of a risk that a bond manager could be hurt by copycats. That's because Total Return holds thousands of individual bonds, versus the dozens of securities in many actively managed stock funds.

Can PIMCO's expertise boost returns enough to offset the higher expenses? They have a solid track record but there are no guarantees. 

Portfolio differences

The portfolios of the ETF and mutual fund won't be identical. Although both will hold a diversified mix of bonds with an average maturity of around five years, the ETF won't invest in derivatives. Those are investments such as futures and options whose value is linked to the performance of another security. The Total Return mutual fund often uses derivatives as a hedging tool to reduce risk. Because of the differences and the varying expenses, investors shouldn't expect identical returns. How widely they'll vary won't become clear until the ETF has a long-term record.

Size limitations?

PIMCO Total Return is already huge and the ETF launch could make it more challenging for Gross to successfully manage so much money. Big funds sometimes lose a performance edge because their managers can't operate effectively when they have a huge impact on the market segment they invest in. But Gross has successfully adapted before as his funds have attracted more investors.

"If there's an upper limit to how much money Gross can successfully manage," says Morningstar's bond research director, Eric Jacobson, "I don't think we're there yet."