PIMCO, the California-based ETF and mutual fund issuer, appears to be on a roll as of late and is looking to keep up its momentum with its latest SEC filing. In the document, the company revealed plans for three more ETFs targeting various segments of the fixed income world. While some important information was not yet available—such as expense ratios or ticker symbols-- we have highlighted some of the key points from the filing below:
The first of the three looks to be the PIMCO Diversified Income ETF which, according to the filing, hopes to maximize total return consistent with preservation of capital and prudent investment management. This looks to be done by investing at least 65% of total assets in a diversified group of fixed income instruments of varying maturities across both sovereign and corporate issuers.
The filing also highlights that the product looks to have a duration of somewhere between three to eight years and can put capital to work in the high yield space as well, although this is restricted to 10% of the total portfolio (see The Seven Biggest Bond ETFs by AUM).
The product also looks to be an ETF counterpart to the Diversified Income Fund (PDVAX - MF report) which currently has over $5.5 billion in AUM with a yield of about 4.5%. The product is somewhat expensive though, coming in at a 1.15% expense ratio, although it has outperformed broad benchmarks over long time periods.
Currently PDVAX has a Zacks Mutual Fund Rank of 1 or ‘Strong Buy’.
Another ETF that came across in the filing looks to be the PIMCO Low Duration ETF, which looks to have a similar focus as its Diversified Income counterpart. However, the product looks to have a lower level of interest rate risk as the ETF will have an average portfolio duration between one and three years.
The proposed ETF also has the ability to put at least 10% of its total assets in high yield securities while it may also put up to 30% of the portfolio’s assets in foreign currency bonds. Lastly, investors should note that up to 10% of the total assets can go to emerging market securities as well (see The Guide To China Bond ETFs).
This proposed ETF looks to be the exchange-traded counterpart to the PIMCO Low Duration Fund (PTLAX - MF report) which has over $21 billion in AUM and a yield of 2.5%. The product does have a high turnover ratio and expenses at 85 basis points a year, while it has performed in-line with similar benchmarks over long time periods.
Currently PTLAX has a Zacks Mutual Fund Rank of 4 or ‘Sell’.
The last product in the latest filing was the PIMCO Real Return ETF, a product which looks to maximize real return while still preserving capital and applying prudent investment strategies. This looks to be done by putting at least 80% of capital in inflation-indexed bonds issued by both the U.S. and non-US governments, agencies, and corporations.
In essence, all bonds in this fund will in some way offer to match the changes in an official inflation figure thus providing investors with a ‘real return’ above the rate of price changes in the general economy.
This product looks to be the ETF counterpart to the ultra-popular PIMCO Real Return Fund (PRTNX - MF report) which has over $23 billion in AUM and a yield of 2.5%. Although the cost and turnover are somewhat steep, coming in at 0.9% for expenses and 129% a year for turnover, the product has managed to significantly outperform inflation-protected bond indexes over the long haul.
Currently PRTNX has a Zacks Mutual Fund Rank of 1 or ‘Strong Buy’.
Capitalizing On BOND
Clearly, the filing looks to follow in the footsteps of the PIMCO Total Return ETF (BOND - ETF report) . The product launched less than three months ago but has already amassed close to $1.3 billion in assets while trading more than 300,000 shares a day (read Checking In On BOND).
These figures have shattered the growth rate levels that most of the other actively managed products have seen in recent months and it has single handedly rekindled interest in the actively managed world. After all, if Bill Gross is willing to put his legendary total return bond fund into ETF form it speaks volume about the future of the industry and how many managers are seeing the writing on the wall for the mutual fund space (see ETFs. vs. Mutual Funds).
With that being said, one has to take BOND’s success with a grain of salt when trying to apply it to the rest of the industry. Bill Gross is one of the few superstar managers left and his total return fund was already the most popular bond fund in the world. If anything, it would have been more of a surprise of BOND didn’t take off and accumulate a decent amount of assets in a short period of time.
Thanks to this reality, the proposed funds from PIMCO could have a more difficult time accumulating assets, although they aren’t exactly weaklings in the AUM department either. In fact, the three mutual fund versions of the products combine to have more than $50 billion in assets suggesting a deep pool of investors who are already interested in the philosophies being espoused by these funds (see Three Bond ETFs For A Fixed Income Bear Market).
However, investors should note some of the management changes in the ETF versions and also realize that the ETFs will likely not be able to use derivatives, much like BOND but unlike the mutual fund versions. Furthermore Bill Gross will not be running PTLAX—instead it will be headed by Marc Seidner—while the other two ETFs will retain the same management.
Given the lack of derivatives and the less well-known nature of some of these funds, PIMCO could find it difficult to replicate the success that they experienced with BOND. However, all of the mutual fund versions of the proposed ETFs are already pretty popular in their own right, suggesting that if performance can remain high and if expenses are reasonable, these ETFs could see some inflows if they ever pass through the regulatory process.
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