Pimco Total Return ETF has churned out superb returns in its debut year — and has done so without using derivatives

Investors who were prescient enough to buy the actively managed exchange-traded fund run by Bill Gross have been rewarded handsomely. Pimco Total Return Exchange-Traded Fund (symbol BOND ). which will turn one year old on March 1, has been on a tear.

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The ETF, which Gross runs in the same fashion he manages his firm’s flagship — the Pimco Total Return mutual fund (PTTDX — returned 12.2.% from its inception through February 14. Over that period, it whipped its benchmark, the Barclays U.S. Aggregate Bond index, by a whopping ten percentage points. And it beat its mutual fund cousin by five points. The ETF has already gathered $4.1 billion in assets. The mutual fund, the world’s largest, holds $286 billion.

Gross says he’s particularly proud of the ETF’s record because it was accomplished without the heavy use of derivatives (instruments that derive their performance from the performance of other investments). We’re glad to have BOND around because it proves that derivatives aren’t the secret to Pimco’s secret sauce, he says. Unlike the traditional mutual fund, the ETF can’t use derivatives because of a Securities and Exchange Commission ban on the use of these instruments by new actively managed ETFs that was in place at the fund’s inception. The SEC lifted that ban in December, so Gross will be able to employ derivatives in the ETF as soon as the fund’s board of directors grants approval for their use, a move that could occur within a few weeks, says Gross.

Even so, he doesn’t anticipate making big use of the stuff once he gets the go-ahead. Pimco is becoming less and less of a derivatives firm, Gross says. Not because we’ve been chastened but because there’s no high-grade octane in most derivatives anymore. He says that futures contracts, which represent bets on the future price of something, currently account for 2% of assets in the mutual fund version of Pimco Total Return, compared with a historical range of 20% to 25%. And swaps currently account for 1%, compared with a historical range of 10% to 15% (swaps represent a promise to pay something in exchange for something else, such as a promise to pay a fixed rate and receive an adjustable rate). Gross dismisses the notion that he has come to rely more heavily on derivatives because of the ballooning asset base of the flagship Pimco Total Return fund.