How Gundlach’s TOTL Stacks Up Vs. BOND
The SPDR DoubleLine Total Return Tactical ETF (TOTL | C), launched less than 12 months ago, is nearing the $2 billion-in-assets-under-management mark. That achievement came without one single day of net outflows, making TOTL one of the most successful ETF launches ever.
To put it in the words of Bloomberg’s ETF expert Eric Balchunas, TOTL is the “ETF equivalent of a no-hitter.”
There are a few reasons why TOTL is standing out, and perhaps the most obvious one is its performance relative to its main competitor, the PIMCO Total Return (BOND | B). BOND today has $2.7 billion in total assets, attracting $352 million in net inflows since TOTL came to market.
The chart below shows total returns since TOTL’s inception last February:
Chart courtesy of Stockcharts.com
Key Portfolio Differences
That outperformance is linked to a few differences between the funds:
1. Focus on mortgage-backed securities
In theory, both TOTL and BOND are actively managed strategies that set out to deliver outperformance relative to the Barclays Aggregate Index. But the ETFs go about it in very different ways.
TOTL is a mortgage-concentrated portfolio, whereas BOND is a broad take on the fixed-income market.
Mortgage-backed securities (MBSs) represent nearly 60% of the overall mix in TOTL—that’s more than twice the weighting those securities have in the benchmark Agg index, and nearly twice the weighting MBSs have in BOND, at 36% of the market value of the fund.
These agency-backed pass-through securities are often seen as free of credit risk because they have the full implied backing of government agencies. They are also highly liquid, and have historically delivered attractive yields relative to Treasurys.
2. Difference in Treasury allocation
If TOTL is mortgage-heavy, it currently offers pretty light exposure to U.S. Treasurys, which represent less than 10% of the overall portfolio, according to the fund’s website.
BOND, on the other hand, has a 31% weighting—or three times as big an allocation.
3. Use of derivatives
TOTL does not currently invest in any derivatives contracts. BOND relies on those types of contracts.
Nearly 40% of BOND’s portfolio today is in nonrated securities, according to PIMCO’s website. A lot of those securities—but not all—are derivatives such as swaps or futures.
4. Country exposure
TOTL is U.S.-centric and it has been from day one. The majority of its assets are in the U.S. bond market—and as of today, 87.8% of the portfolio is allocated to U.S. debt securities.
In BOND, a focus on U.S. debt has changed in recent months. Today the U.S. represents about 42% of the fund’s market-value weight, and that equates to roughly 87% of the fund’s duration weight. But just eight or so months ago, BOND tilted toward foreign debt, and the U.S. represented little more than 60% of the fund’s duration bets.
5. Maturity and duration
There are myriad maturity and duration data on both funds. And what makes an apples-to-apples comparison tricky is the fact that each firm reports those measures slightly differently. For instance, BOND uses an effective duration metric that takes into account interest rate sensitivity including callable securities. Meanwhile, TOTL uses a modified adjusted duration figure that’s calculated as the percentage change of the portfolio’s value for 100 basis point change in yield.
But when it’s all said and done, TOTL has—and always has had—a shorter duration than BOND and the Barclays Agg index. Effective duration in TOTL, taking into account the fund’s cash position, is roughly 3.7 years. BOND has effective duration of about 4.5 years.
Duration is significant in assessing a fund’s sensitivity to interest rates. And TOTL is not only less sensitive to rate risk, it’s shelling out slightly higher yields. The fund’s 30-day yield is 3.08%, while BOND’s is 2.71%, according to the funds’ websites.
Semantics On Performance
These portfolio construction differences speak to the key role a portfolio manager plays in an actively managed strategy.
TOTL is outperforming BOND. DoubleLine’s Jeffrey Gundlach’s take on the space has delivered larger gains relative to PIMCO’s approach. There’s no question about that.
But you could argue that BOND isn’t necessarily underperforming. The fund has, since its inception in 2012, delivered 4.67% in total returns—after fees—outperforming the Agg index by 243 basis points, or 2.43 percentage points.
In other words, BOND’s management team of Scott Mather, Mihir Worah and Mark Kiesel have been delivering to PIMCO investors exactly what they said they would: outperformance relative to the Agg index. BOND is behaving according to design.
BOND More Volatile
Or, you could also argue that it’s not so much that TOTL is outperforming as it is that BOND is much more volatile in comparison, FactSet’s Head ETF Analyst Elisabeth Kashner says.
“Since TOTL’s launch last February, BOND’s daily standard deviation of returns has been .21% versus .15% for TOTL,” Kashner said. “This is likely due to greater risk-taking at PIMCO.”
In other words, since TOTL launched, BOND has outperformed by as much as 1.07% and underperformed by 1.73% cumulatively (total return NAV), she says. Nailing down the source of that risk—whether it’s credit or duration—is difficult because PIMCO uses many OTC derivatives that make comparative analysis challenging.
In the end, it’s up to investors to decide whether their views on the market align with the various portfolio tilts each manager is making in order to stay ahead of the segment benchmark.
Contact Cinthia Murphy at cmurphy@etf.com
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