By Ben Eisen, MarketWatch
NEW YORK (MarketWatch) — Two weeks after Bill Gross left Pimco, investors are still struggling to decide where to put their fixed-income money. And that’s a boon to some of the biggest bond market ETFs.
Investors pulled $23.5 billion out of Pimco Total Return Fund /zigman2/quotes/206986610/realtime PTTRX +0.19% /zigman2/quotes/210424051/realtime PTTAX +0.19% in September, according to Pimco. They withdrew another $871.8 million from the comparable exchange-traded fund /zigman2/quotes/207852069/composite BOND +0.13% in the nine days following Gross’s departure, according to Morningstar.
But after making a surprising exit from the world’s biggest bond fund, mom-and-pop investors have a tough decision about whether to stick with a traditional mutual fund offering or venture into something new. In the meantime, the biggest exchange-traded funds that invest in the most liquid parts of the bond market are serving as an easy place to park cash, at least temporarily.
The iShares Core US Aggregate Bond /zigman2/quotes/200660887/composite AGG +0.23% , Vanguard Total Bond Market ETF /zigman2/quotes/203732548/composite BND +0.20% and the The iShares 1-3 Year Treasury Bond ETF /zigman2/quotes/204549300/composite SHY +0.02% have all seen inflows jump sharply since Gross’s departure, as the below chart shows.
That helps validate the adage that, “when you fire your manager and you don’t know where to go, you can temporarily go to an index fund,” said Michael Rawson, an analyst at Morningstar.
The flows into those three ETFs compare pretty favorably with the outflows from the Pimco Total Return ETF, as the chart below of aggregate flows shows:
That said, there are some mutual funds that have emerged as winners amid the Pimco shakeup (Read: These funds are benefiting from Bill Gross’s Pimco exit).
Rick Rieder, chief investment officer of fundamental fixed income for BlackRock, who manages the Strategic Income Opportunities Fund /zigman2/quotes/208837185/realtime BSIIX 0.00% , thinks Gross’s departure is something of a watershed moment for so-called unconstrained bond funds. (After all, the bond specialist left Pimco to run the Janus Unconstrained Bond Fund /zigman2/quotes/209617174/realtime JUCAX 0.00% .) As the name implies, such so-called unconstrained investment vehicles aren’t restricted to certain indexes or durations but have the broader mandate to invest anywhere the portfolio manager thinks will generate rich returns.
“You can have an investment portfolio at significantly lower risk,” said Rieder, referring to these unconstrained funds. “You can reduce some of the interest-rate exposure. You can reduce your volatility. You’re not just in a fixed-income portfolio.”
There are still plenty of investors who see the merits of more plain-vanilla bond funds. Michael Temple, director of U.S. credit research at asset-manager Pioneer Investments, said he has seen a lot of clients that want to stick with a traditional bond fund strategy.
Nevertheless, Temple adds, “many investors are beginning to do their homework.”