Pimco Total Return A Mutual Fund Versus ETFs

Much chatter since last Friday about Bill Gross leaving Pimco to sign on with Janus Capital Group.  Gross, for those not in the know, was the legendary "Bond King" largely responsible for the asset management firm Pimco's rise to fame.  I'm not interested in rehashing why Gross left and what the implications might be for either firm.  I don't care.  I know Gross has been lionized in the press over the years for having stellar performance running Pimco's Total Return Fund {Symbol PTTAX}.  If you want to see a really good write-up of this, go read Josh Brown's piece from the weekend over at the "Reformed Broker".  I think he does a pretty good job of telling you what you need to know if your're interested in this sort of thing.  

Here's what I know and care about.  If you wanted an allocation to bonds you could have largely mimicked PTTAX's strategy over the past few years at a much cheaper rate.  The ETF Database lists four funds that carry a similar strategy to PTTAX in that they all use the Barclays Capital US Aggregate Bond Index as a benchmark.  PTTAX also carries an expense ratio of 0.90% per ETF Database.  The four funds along with the respective symbols and expense ratios are SPDR Barclays Aggregate Bond ETF {LAG-expense ratio 0.16%}, Total Bond ETF {BND-expense ratio 0.08%}, Core Total US Broad Market ETF {AGG-expense ratio 0.08%}.  US Aggregate Bond ETF {SCHZ-expense ratio -.08%}.

Here on a return basis is how these funds have stacked up in the past year or so with PTTAX.  {Performance chart from "Stockcharts.com".}

I need to point out that PTTAX has slightly outperformed these four ETFs longer term, but Josh Brown in his post listed above details how Gross made a wrong headed bet on US Treasury bonds in 2011.    You can read more detail about that trade from Cullen Roche over at "Pragmatic Capitalist" here. The chart above shows how the fund has underperformed since the end of 2012.  Indices, being passive investments don't make bets like active managers.  Investors make the bet by making their allocation to an asset class.  

So I'll asks the question. All things being equal why allocate money to a mutual fund manager that charges significantly more for almost the same portfolio that you can have with an ETF with underperforming results?  I don't understand it and I'm sure many investors if they dig a bit into their portfolios wouldn't understand it either.