Pimco Launches BABs, Corporates ETFs

September 21, 2010

The world’s biggest bond fund manager deepens its involvement in ETFs with corporate debt and BABs offerings.

Pimco, the world’s largest bond fund manager, launched two new ETFs focused on investment- grade corporate bonds and Build America Bonds municipal debt, bringing new products into one of the fastest-growing parts of the exchange-traded fund universe.

The Investment Grade Corporate Bond Index Fund (NYSEArca: CORP) is based on the BofA Merrill Lynch US Corporate Index, an unmanaged index comprising U.S. dollar-denominated, fixed-rate corporate debt with at least $250 million outstanding. Pimco’s fund will track the index using a proprietary representative sampling process.

Pimco will seek to avoid illiquid securities and bonds in the BofA Merrill Lynch US Corporate Index that it determines have the highest risk of default. According to Pimco’s Web site, the top holdings of the fund will not be available until CORP has been trading for at least one month.

CORP carries total operating expenses of 0.32 percent.

Active BABs ETF

The Build America Bonds Strategy Fund (NYSEArca: BABZ) is an actively managed ETF that invests in Build America Bonds listed in the Barclays Capital Build America Bonds Index with a par value of at least $250 million and that are determined to be investment grade by Barclays Capital. BABZ carries an expense ratio of 0.45 percent.

The U.S. municipal bonds complex, once a solid option for investors looking for low risk coupled with relatively high yield, has suffered a series of downgrades and defaults since the housing sector began to deflate in 2008. Instead of investing wholesale in the Barclays index, Pimco will cherry-pick bonds and conduct its own issuer-specific credit analysis on individual municipalities.

Competing Funds

Pimco’s new products will compete head-to-head with two already well-established ETFs. CORP’s focus on investment-grade corporate bonds places it in direct competition with the iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD), a behemoth with $14.5 billion under management and an expense ratio of 0.15 percent.

BABZ will go up against the PowerShares Build America Bond Portfolio (NYSEArca: BAB), which has accumulated $554.4 million in assets since it launched last November and carries an expense ratio of 0.35 percent.

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