Pimco To Launch First Short-Term TIPS ETF

August 24, 2009

Pimco is ready to launch the first short-term TIPS ETF in the U.S.


Pimco is set to launch its second exchange-traded fund on Monday, again sticking with short-term Treasuries.

This time, however, the world’s biggest bond fund manager is moving into Treasury Inflation-Protected Securities. It’s a market with two entrenched competitors already vying for investment dollars. But TIPS have been hot attractions so far this year, and if inflation hawks are correct, could heat up even more in coming years.

New Competition

The Pimco 1-5 Year U.S. TIPS Index Fund (NYSE Arca: STPZ) will be the first to focus on the short-end of the yield curve. The two others already on the market take an intermediate tilt: the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) and the SPDR Barclays Capital TIPS ETF (NYSEArca: IPE).

State Street Global Advisors also sponsors a global TIPS ETF, the SPDR DB International Government Inflation-Protected Bond ETF (NYSEArca: WIP). It has a longer duration than TIPS and IPE, which are hovering around eight years right now; WIP is listed with an average adjusted rate of slightly more than nine years.

The average duration of STPZ is about three years, according to Tammie Arnold, head of Pimco’s global wealth management group. She noted that short-term TIPS have produced higher correlations to inflation in the past five years (about 27% for STPZ’s underlying index and 6% for the broader TIPS market).

“Our short-term TIPS ETF is designed to be a more pure-play inflation-protection investment. It should expose investors to fewer of the risks associated with rising interest rates than longer-term TIPS funds,” Arnold added in an interview from the firm’s headquarters in Newport Beach, Calif.

All three U.S. TIPS ETFs are priced similarly: STPZ and TIP at 0.20% each with IPE at 0.18%. On the international side, WIP is charging 0.50%. Also, the 30-day SEC yields for TIP and IPE are around 1.50% while WIP’s is at 1.82%.

Different Index, Same TIPS Focus

The new STPZ will follow a Merrill Lynch index rather than the Barclays benchmark preferred by TIP and IPE.

Pimco’s John Cavalieri, however, downplays the significance of using a different index considering the rather limited number of U.S. TIPS issues actually available—roughly around 30 at any given time.

“The real key is the maturity segmentation of our index,” said Cavalieri, a Pimco senior vice president and real return product manager. “The other TIPS ETFs on the market cover the broader spectrum of TIPS available, including intermediate- and long-term issues.”

Despite deflation remaining a force in the U.S. economy, investors are still concerned about rising oil and commodities prices and looming federal budget deficits. A common investment theme has been to buy TIPS, with their built-in inflation protection, when the cost of such insurance is relatively low.

As a result, TIP has had the largest cash inflows into any fixed-income ETF this year. (See related research here.)

“We think this [STPZ] is a real sweet-spot type of product right now,” said Cavalieri. “By focusing on the short end of the maturity curve, we’re addressing the two main concerns we’ve heard from investors.”

Those are: inflation protection and protection against the risk of rising interest rates, he added. While other ETFs can provide the former, Cavalieri points out that STPZ is uniquely positioned to fight the latter.

“It boils down to this ETF providing exposure to the short end of the maturity curve, which limits interest rate sensitivity, which is commonly referred to as a fund’s duration,” he noted.

Two More TIPS ETFs Coming From Pimco

Pimco, the world’s largest bond fund manager by assets, is also planning to come out with two other TIPS ETFs. By early next month, it’s expecting to fill out the firm’s U.S.-focused TIPS lineup with: The Pimco Broad U.S. TIPS Index Fund (TIPZ) and the Pimco 15+ Year U.S. TIPS Index Fund (LTPZ). Both will also be tied to Merrill Lynch benchmarks.

In early June, the firm managing more fixed-income assets than anyone else came out with its first ETF, the Pimco 1-3 Year U.S. Treasury Index Fund (NYSEArca: TUZ). That was a change of pace for Pimco, which had planned to make an intermediate-termed bond ETF its first entry into the market. But with interest rates still at historically low levels, it shifted tactics and decided to introduce TUZ instead. (See related story here.)


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