Just two months after PIMCO’s incredible success with the Total Return ETF (BOND - ETF report) , it looks as though the California-based bond management giant is back at it again with another new fund. This time, PIMCO looks to help investors better manage inflation expectations in the fixed income world via its Global Advantage Inflation-Linked Bond Strategy Fund (ILB - ETF report) .
This product is an actively-managed ETF that primarily consists of high-quality inflation linked bonds that span across developed and emerging markets. Investors should also note that the product will not and cannot use options, futures, or swaps in its strategy, while expenses look to come in at 0.60% a year after waivers.
TIPS In Focus
Generally speaking, bonds included in this fund are tied to the CPI of a particular region or nation and look to provide a degree of protection against inflation. This is done by increasing or decreasing the face value of the bond based on observed changes in CPI and then paying out a real rate of return based on this figure to investors (read Is The Bear Market For Bond ETFs Finally Here?).
In the case of U.S. TIPS, this process is done twice a year and bonds are not permitted to fall below their par value level. Thanks to this, deflation isn’t very much of a problem for TIPS, especially if prices are already close to the levels they were at when the bonds were first issued.
The main downside to this approach is that investors often have to accept a lower yield in order to obtain the inflation protection. The securities are backed by the government and have virtually no credit or inflation risk, unlike many other bond securities, so while you will be well-insulated from many risks, investors seeking high levels of current income could be disappointed (also read Are The Fundamental Bond ETFs Better Fixed Income Picks?).
ILB’s unique approach
Unlike many ETFs in the TIPS segment, ILB has a broad focus which includes both American and international inflation-protected sovereign bonds. As such, it can act as a global barometer for the space, holding both developed and emerging inflation-linked bonds. Furthermore, most of the products in the TIPS ETF world are passively managed, making ILB’s active approach relatively unique.
This strategy is also based on PIMCO’s ability to apply their views on individual countries and their inflation expectations and currency situations to the TIPS market. Additionally, the team also takes a special look at maturity and duration positioning in order to achieve a nice balance between risk and reward (see Three Outperforming Active ETFs).
It should also be noted that the product is also going to put itself up against a GDP-based secondary benchmark for inflation linked bonds. This index looks to focus on economies that are driving global growth rather than maintain exposure to market cap-weighted, more traditional, systems.
Nevertheless, the approach tilts the fund towards the world’s biggest issuer of Treasury securities, the United States. Securities from America constitute over 85% of the portfolio, while Australia, Mexico, Brazil, and the UK, round out the rest of the top five (see more in the Zacks ETF Center).
In total, the product holds 38 securities in its basket and has a relatively short effective duration of just over seven years. Unfortunately, yield data is not available yet due to the newness of the product, although similar—but passively managed—funds in the TIPS market pay out 30-Day SEC Yields around the 4.2% mark.
TIPS ETF Competition
Currently, there are a number of ETFs in the inflation-linked bond space, including several from PIMCO. However, these are usually focused on the American space although a few companies have launched international inflation-linked bond ETFs as well. Beyond these, the only true competition in the space at this time looks to be the Global Inflation-Linked Bond Fund (GTIP - ETF report) .
This fund tracks the BofA Merrill Lynch Global Diversified Inflation-Linked Index which is a benchmark of inflation-linked bonds from around the world. Currently, the product charges just 40 basis points a year in fees and pays out a robust 4.2% yield to investors.
In terms of exposure, assets are tilted towards American securities, although bonds from the UK, Brazil, and France round out the top four. The portfolio’s breakdown for duration is also skewed towards the middle of the curve; the weighted average maturity is about 11.9 years with the majority of bonds coming due from 1-10 years from now (also read PIMCO Total Return ETF Launches).
However, investors should note that the product has failed to amass a great deal in assets as it still has less than $20 million in AUM. Yet with that being said, PIMCO’s new Total Return fund has seen a great deal of interest as have many of the firms other TIPS-focused products.
As a result, the company may be able to, with its unique methodology, buck the trend in this global inflation-linked bond space and accumulate a robust amount of assets, although only time will tell with this brand new bond ETF.
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