By Jessica Toonkel Fri Jan 27, 2012 2:46pm EST (Reuters) - Pacific Investment Management Co is touting the March 1 rollout of its Total Return ETF as a cheaper, more transparent way for mainstream investors to access bond guru Bill Gross. Since the ETF will be managed by Gross and has the same investment strategy as the $244 billion Total Return mutual fund Gross also manages, it might seem it should have the same returns.But the ETF, which at 55 basis points will cost nearly half of what retail shares cost, may not track the performance of the Total Return Fund as closely as they expect.The reason: the ETF cannot use derivatives, an instrument the mutual fund relies on to manage risk, gain exposure to positions quickly and efficiently and help bolster returns.The Total Return Fund, a bond fund that invests mostly in intermediate-term securities, relies on derivatives, including futures, options and swap agreements "without limitation," according to the fund's prospectus.The Pimco Total Return ETF is not allowed to use derivatives because the U.S. Securities and Exchange Commission has issued a temporary moratorium on approving any new ETF products that use derivatives, pending an SEC review of whether derivative use by ETFs is too risky."It takes away one tool out of their toolkit," said Eric Jacobson, director of fixed income research at Morningstar.The inability to use derivatives raises some questions about how closely the new ETF will be able to track the mutual fund's performance. While investors pulled $5 billion from the fund last year due to poor performance related to Gross's bet against U.S. Treasuries, it has outperformed its benchmark, the Barclays Capital U.S. Aggregate Bond Index, for 17 of the past 24 years."All eyes are on what Pimco does with the Total Return ETF," said Tom Lydon, president of Global Trends Investments, a registered investment adviser. "There is a question about whether there is going to be a marked difference between the ETF and the fund," Lydon said.A Pimco spokesman declined to comment.It is hard to determine how heavily the mutual fund relies on derivatives because each contract has a different notional value that is not explained in the fund's holdings report, Jacobson said."For example, a Treasury bond future normally has a contract size of $100,000, and a euro dollar future may be a $1 million contract, but there are numerous other kinds of derivatives in the portfolio and you have to be familiar with each one in order to know how large each contract is," he said. The mutual fund holds thousands of different positions at any given time.Since the ETF won't initially have billions of dollars to manage, it may not need to rely on derivatives as the bigger mutual fund does, experts said.The sheer amount of money the Total Return Fund has to invest is one reason it uses derivatives instead of buying positions in some bonds. The fund often cannot buy the postions because its investment may exceed what is available to buy.The smaller ETF will not have that problem initially, analysts said. But as the ETF adds assets, not being able to use derivatives could become a problem if the fund gets too big to buy individual bonds.And that could happen quickly. Earlier this month, Gross, co-chief investment officer at Pimco and manager of the fund and the coming ETF, said he hopes that the ETF will ultimately be the biggest one available [ID:nN1E809078].Currently, State Street Global Advisors' $101 billion SPDR S&P 500 ETF is the largest ETF. A larger ETF might not be so good for investors, experts said."If the Total Return ETF gets to be the size of the Total Return Fund, that would be 25 percent of the entire ETF industry all on its own," said Dave Nadig, director of research at ETF research firm Index Universe. "I am not sure the industry is ready for that."Even so, some investors may prefer the ETF over the fund, even if it doesn't track the performance of the Total Return Fund simply because the ETF will not use derivatives, resulting in greater transparency.Many investors were burned by derivatives like credit default swaps and mortgage-backed securities during the financial crisis, said Sam Campbell, director of research at mutual fund research and consulting shop Fuse Research Network.Some fund management research teams "that use the Total Return Fund ... (say) they have no idea what they are holding because of its use of derivatives," said Sam Campbell, an analyst with FUSE Research Network.(Reporting By Jessica Toonkel; Editing by Gary Hill) Бесплатные советники на форекс.