Pimco Launches Active ETF Money Market Alternative

November 17, 2009


Today marks the start of trading for Pimco’s latest ETF offering, the Pimco Enhanced Short Maturity Strategy Fund (NYSEArca: MINT). On the surface, this looks like just another entry into the short-term bond market, a competitor to funds like the Vanguard Short-Term Bond Fund (NYSEArca: BSV), any of the iShares short term bond funds (NYSEArca: CSJ, SHY, SHV), or something super short like the SPDR Barclays Capital 1-3 Month Treasury ETF (NYSEArca: BIL).

In reality, the fund isn’t looking compete to for those dollars. It’s really competing for people’s money market mutual funds, an area relatively untargeted by ETF issuers in the
United States
. (In
Europe, money market ETFs are all the rage, but they’re based almost exclusively on swap contracts, not underlying fixed-income instruments.)

“We think it will offer attractive yields compared to a money market fund,” said Jerome Schneider, deputy head of Pimco’s money market desk and the funds portfolio manager. “It will be a bridge between pure cash deposits and longer bond funds.”

Because it is active, the fund will theoretically be able to make opportunistic bets that traditional passive bond ETFs miss, no matter how they’re structured. “By investing in a passive money market fund, you’re giving up yield for the sake of having pure liquidity. That may not be appropriate in this day and age.” Because MINT is explicitly targeted at “non-immediate” cash allocations, the fund can invest out up to a year in duration, and across the full spectrum of investment-grade bonds.

Because the fund is launching as we speak, there’s no yield information for the fund, as there needs to be a 7-day live window to calculate SEC yield. However, Pimco expects the yield difference between money market funds and MINT to be “significant.”

“We’re going to look across the array of investment grade assets, from T-bills to agency discount notes to commercial paper to corporate bonds and mortgages. The opportunity set is very large, and we’re looking to collect the liquidity premium, instead of paying a liquidity premium, which is the situation most money market funds are in.”

Pimco, which does have a strong reputation as an active bond manager, is launching MINT as the first of three strategies targeted at cash holders. The other two strategies?the government-limited maturity strategy fund and the prime limited maturity strategy fund (NYSEArca: GOVY and PPRM)?are out of their quiet periods and should be launching shortly. Both feature even tighter constraints on their investment pools, and are targeted more directly at cash investors.

Interestingly, the fund will accept both in-kind and cash creations and redemptions, nearly guaranteeing that the spreads are well-constrained.

Pimco charges a management fee of 34 basis points?not insignificant for a bond fund, but cheaper than many actively managed mutual funds in the same space.

More information can be found at www.pimcoetfs.com.


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