BND Vanguard Total Bond Market

PIMCO, the California-based ETF and mutual fund issuer, appears to be on a roll and is seeking to triple its active ETF roster by offering variations for the popular mutual funds not only in the fixed income world, but also in the broad space – including equities and commodities.
 
The issuer launched two active ETFs – PIMCO Diversified Income ETF (DI) and PIMCO Low Duration ETF (LDUR) – on January 23 and is keeping up the momentum with its latest SEC filing. In the document, the company revealed plans for six more ETFs; four targeting various corners of the fixed income world, one targeting equities, and the other aiming at the commodity space.
 
While a great deal of the key information – such as expense ratios or ticker symbols– was not available in the initial release, other important points were available in the filing. We have highlighted those below for investors, who might be looking for a new play from PIMCO in a number of markets should the proposed products pass regulatory hurdles:
 
PIMCO Municipal Bond ETF in Focus
 
This fund looks to offer higher returns by investing in municipal debt securities, which are exempt from federal income tax. The average duration of the fund would range from 3–12 years (read: Three Municipal Bond ETFs for 2014).
 
According to the filing, the ETF will put about 20% of its assets in U.S. government securities, money market instruments or private activity bonds. About 50% of the portfolio is evenly split between California and New York bonds, and the municipal bonds that finance education, health care, housing, transportation, utilities and other similar projects. Industrial development bonds would take the remaining share in the basket.
 
This new fund looks to face stiff competition from Market Vectors-Intermediate Municipal Index ETF (ITM), which has amassed $575.1 million in AUM and has a modified duration of 7.46 years. ITM charges 24 bps in annual fees from investors.
 
PIMCO Foreign Bond ETF (U.S. Dollar-Hedged) In Focus
 
This fund seeks to provide maximum total return, consistent with preservation of capital and prudent investment management. The product looks to target the short end of the yield curve with average duration of within three years.
 
As per the filing, the ETF looks to invest in a variety of foreign bonds selected on a number of factors including interest rates, exchange rates, monetary and fiscal policies, trade and current account balances.
 
With respect to competition, Vanguard Total International Bond ETF (BNDX) would threaten the success of the proposed fund as it has managed assets of nearly $863.1 million. Average duration of BNDX is 6.6 years and expense ratio came in at 0.20% (read: 3 Successful ETF Launches of 2013).
 
PIMCO Income ETF in Focus
 
This fund aims to maximize current income by investing in a broad array of fixed income sectors globally and provides long-term capital appreciation. The average duration of the fund would range from 0–8 years.
 
The direct competitor of this fund could be the newly launched RiverFront Strategic Income Fund (RIGS) that has been able to attract $173.4 million in its asset base since its debut in October 2013 (read: New Income ETF Launches: RiverFront Strategic Income Fund).
 
PIMCO Unconstrained Bond ETF in Focus
 
This fund looks to provide exposure to a variety of fixed income securities with varying maturities in both investment-grade and high yield securities (junk bonds). However, the high yield securities investment is restricted to 40% of the total assets as per the filing. Further, exposure to foreign debt is also limited to 35%.
 
The product would likely face tough competition from Vanguard Total Bond Market ETF (BND) that has about $17.7 billion in AUM and targets intermediate yield of the curve with duration of 5.5 years.
 
The second competitor could be Vanguard Short-Term Bond ETF (BSV) that has an average duration of 2.7 years and manages assets of nearly $14 billion. Both funds charge 10 bps in fees a year from investors.
 
PIMCO Stocks Plus Absolute Return Strategy ETF in Focus
 
This fund looks to beat the total return of the S&P 500 Index using bonds and equity derivatives. According to the filing, the fund manager would utilize an absolute return approach for managing the bonds securities and gain long exposure in the S&P 500 Index derivatives instead of the S&P 500 Index stocks (read: 3 Niche ETFs That Will Keep Flying).
 
Though the fund does not have a direct competitor, a funds like the IQ Hedge Multi-Strategy Tracker ETF (QAI) might provide stiff competition to the absolute return strategy.
 
PIMCO Commodities Plus AR Strategy ETF in Focus
 
This fund looks to beat the total return of the Credit Suisse Commodity Benchmark using bonds and commodity derivatives. According to the filing, the fund manager would utilize an absolute return approach for managing the fixed income securities and gain exposure to the commodity futures markets through commodity-linked derivative instruments including commodity index-linked notes, swap agreements, commodity options and futures contracts.
 
Currently, there is no direct competitor for this fund.
 
Bottom Line
 
Given the volatility in both the equity and bond markets, it is difficult to say how the proposed funds from PIMCO will be received by investors should they pass regulatory hurdles. However, if they do pass the regulatory hurdles and are then able to show some outperformance compared to broad indexes, they might receive some interest from investors who like an active approach in relatively unique markets.
 
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VANGD-TOT BOND (BND): ETF Research Reports
 
VANGD-TTL INT B (BNDX): ETF Research Reports
 
VANGD-SHT TRM B (BSV): ETF Research Reports
 
PIMCO-DIVRS INC (DI): ETF Research Reports
 
MKT VEC-ITM MUN (ITM): ETF Research Reports
 
PIMCO-LO DURATN (LDUR): ETF Research Reports
 
RIVR-STRAT INCM (RIGS): ETF Research Reports
 
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