The SEC is peeling back the covers on common practice.

The Wall St. Journal headline this morning certainly wakes you up: PIMCO ETF Draws Probe by SEC .

So what’s really going on here, and has PIMCO done anything wrong? And should anyone be surprised?

When the PIMCO Total Return ETF (BOND | B) launched in 2012, I fully expected it to outperform. On the day of its launch, I told the Journal the following:

“The advantage of managing the smaller ETF is that it offers Mr. Gross and his team much more flexibility in investment decisions, says Dave Nadig, director of research at [ETF.com]. Because the ETF can buy and sell bonds quickly, it is able to move more nimbly with market fluctuations. It also is able to buy into single bonds, which it isn’t able to do in the Total Return Fund.”

Here at ETF.com, we’ve been calling the ETF the “PIMCO Best Ideas Fund” for years. And having a good idea in the bond market is generally about two things:

1. Getting the macro call right.
2. Finding value.

When it comes to getting the macro call right, there’s not much advantage to actively managing an ETF or a mutual fund or a separate account. It just means being prescient (or lucky) about what’s going to happen with credit spreads and the yield curve. If you pull all of your duration way in right before the 10-year Treasury yield collapses, well, you’re a hero. If you bet hard on corporate debt right before a rash of unpredictable defaults? You’re a goat.

How To Find Value

The “finding value” part of the equation is where the SEC is getting interested. PIMCO is the largest fund manager in the world. It’s the largest bond trader in the world. That gives it enormous buying power.

Because of this enormous power, Pimco has the opportunity to do things smaller investors simply can’t. While that may sound unfair, or against the principles of the market, it’s how all markets actually work.

I, as a small investor, can’t physically go open a gold mine. I don’t have the capital. I don’t know how to dig that well. Someone like Rio Tinto is really good at it. I can participate in Rio Tinto’s success by buying its stock.

Rio Tinto has a competitive advantage, because it has tons of capital and knows how to run gold mines. It’s pretty much exactly what Michael Porter has been writing about at the Harvard Business School for almost 40 years.

PIMCO’s advantages are its size and its knowledge of how the bond market works.

And the bond market, if we’re being honest, is a disaster.