PIMCO’s New ETF Play – Here’s What You Need To Know

By Brian O'Connell AAA

PIMCO, the fixed-income investment management kingpin, has $1.9 trillion in assets under management and a whopping $237 billion under management for its signature PIMCO Total Return Bond Fund. Firm founder Bill Gross has been known to take a "clients first" stand.

Putting clients first is what Gross, and PIMCO, say they are doing with the release of 19 new actively managed exchange-traded funds (ETFs), filed with the U.S. Securities and Exchange Commission, under its official firm name, Pacific Investment Management Co.

Tripling PIMCO's ETF Lineup with Spinoffs

The release triples PIMCO’s ETF lineup, focusing primarily on spinoffs of existing products, including (citations are from PIMCO's web site):

  • PIMCO Income - Seeks to maximize current income. Long-term capital appreciation is a secondary objective. Holds a “broad range of fixed-income securities (0-8 years average duration).”
  • PIMCO Unconstrained Bond - Seeks maximum long-term after-tax return, consistent with preservation of capital and prudent investment management. Holdings include a “broad range of fixed-income investments.”
  • PIMCO Municipal Bond - Seeks high current income exempt from federal income tax, consistent with preservation of capital; capital appreciation is a secondary objective. Holds “investment-grade municipal bonds (3-12 yr. average duration).”
  • StocksPlus - Seeks total return that exceeds that of the S&P 500. Holdings include “S&P 500 Index futures and short-term bonds.”
  • IndexPlus - Seeks total return that exceeds that of the S&P 500. Enhanced RAFI 1000 derivatives backed by an actively managed portfolio of fixed-income securities with an absolute return orientation.

The “active” management part of the new ETF fund launch comes into play with all of the above funds, as active ETFs (unlike their passively managed counterparts), lean heavily on the trading prowess and investment-management acumen of the managers who run the PIMCO funds.

“We believe actively managed ETFs provide another way for investors to access PIMCO’s global strategies across fixed income, equities and commodities, all backed by the firm’s time-tested investment process,” PIMCO said in a prepared statement.

Each ETF is specifically designed to mirror the investment exposure, and likely results, of the PIMCO benchmark mutual funds. For example, if the PIMCO Index Fund generates a given average annual return (14.6% over the past five years), investors can count on the ETF generating the same returns as its mutual fund counterpart on an annual basis.

Fee-wise, the funds average an expense fund ratio of 0.33% (with a range of 0.09% to 0.65%), which makes the PIMCO funds on the lower end of the ETF fee range across the industry.

Still, it's worth noting that PIMCO's fixed-income losing streak continues. According to data from the first quarter of 2014, PIMCO's signature fund, the PIMCO Total Return Fund, lagged both its benchmark and its peers, primarily because it was on the wrong side of long-maturity bonds, which outperformed shorter-maturity bonds for the quarter.

The Bottom Line

In general, the idea of more ETF fund options is a good one for investors, who benefit from lower fees, and competitive performance with actively-managed mutual funds. Consequently, if you value the combination of the low-fee, easy access to expert management model for ETFs, and you believe Bill Gross when he says he puts clients first, PIMCo's new ETF lineup is worth a closer look. But do your due diligence first, and make sure you thoroughly review the underlying mutual funds that the PIMCO ETFs aim to emulate. Do that, and you can leverage the high-spirited but highly effective investment management model of one of the most successful mutual fund firms in the world.

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