Pimco Filings Detail Plans For Active ETFs

July 22, 2009

Pimco reveals details about proposals for a line of active ETFs.

 

The world’s biggest bond fund manager filed on Wednesday to bring to market five active exchange-traded funds and two to track separate Treasury indexes.

The move comes after the Newport Beach, Calif.-based asset manager launched the Pimco 1-3 Year U.S. Treasury Index Fund (NYSE Arca: TUZ). That was its first foray into ETFs. (See related article here.)

Pimco originally filed to enter the ETF market last July. At the time, company officials indicated that more would be on the way (see related story here). The news spurred a host of speculation about other big names entering the ETF market. But the entrance of Pimco, the 800-pound gorilla in bond mutual funds, widely was viewed by industry observers as another promising sign of the emergence of ETFs into the investing mainstream. (See related column here.)

The new filing by Pimco provides more clarity into the company’s plans with ETFs. It includes a prospectus for the five active ETFs it plans to debut. Those include two short-duration portfolios, each with average durations of a year or less:

  • Pimco Enhanced Short Maturity Strategy Fund
  • Pimco Government Limited Maturity Strategy Fund

Interestingly, the Enhanced Short Maturity ETF, which would target investment-grade issues, could invest up to 5% of its total assets in U.S. dollar-denominated securities and instruments that are economically tied to emerging market countries.

Also listed in the active category is the Pimco Prime Limited Maturity Strategy Fund. It would have an average portfolio duration of up to 90 days. It would invest in U.S. dollar-denominated securities that mature within 397 days of purchase. According to the filing, the fund could also buy floating rate U.S. government agency securities that mature within two years from the date of purchase.

Another short-term duration actively managed portfolio would be the Pimco Short-Term Municipal Bond Strategy Fund. It would have an average duration of up to three years, however. “The fund may only invest in U.S. dollar-denominated investment grade debt securities. The fund may invest 25% or more of its total assets in municipal bonds that finance similar projects, such as those relating to education, health care, housing, transportation, and utilities, and 25% or more of its total assets in industrial development bonds,” said Pimco through its filing.

The other active ETFs would be the Pimco Intermediate Municipal Bond Strategy Fund. It would have an average portfolio duration of between three to eight years, depending on Pimco’s forecasts of where interest rates and other economic factors are heading.

As with the short-duration active muni fund, this one will seek to avoid investing in bonds that might trigger the federal alternative minimum tax.

All five active ETFs would have the flexibility to shift durations of the overall portfolios depending on Pimco’s own internal forecasts of interest rate volatility and other factors influencing bond markets. No pricing is included in the prospectus.

The passively managed ETFs being proposed by Pimco are listed in a new registration statement submitted to Pimco, also on Wednesday. Those were for the:

  • Pimco 0-1 Year U.S. Treasury Index Fund. It would follow a Merrill Lynch index that tracks the performance of U.S.-dollar-denominated sovereign debt publicly issued by the U.S. government with maturities less than one year.

“The securities in the underlying index have a minimum $1 billion of outstanding face value, have at least one month and less than one year remaining to maturity, are fixed-rate and are non-convertible. Perpetual and fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the start of the floating rate period,” the filing added.

  • The Pimco 20+ Year Zero Coupon U.S. Treasury Index Fund. It would follow another Merrill Lynch index that tracks the performance of long-dated U.S. Treasury principal STRIPS (Separate Trading of Registered Interest and Principal of Securities).

The document stipulates that “STRIPS that represent the coupon component of underlying U.S. Treasury bonds, or that have been created from Treasury Inflation-Protected Securities, are excluded.”

You can read the prospectus for the active ETFs being proposed here.

The filing for the index-based Pimco ETFs can be found here.

 

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