PIMCO Introduces its First Bond ETF
June 3, 2009

SAN DIEGO (ETFguide.com) – The ETF market has a new face and it’s Pacific Investment Management Co. (PIMCO).

The Newport Beach, CA-based firm is well-known for its diverse menu of fixed-income investments like the PIMCO Total Return Bond Fund (Nasdaq: PTTAX) which is managed by the firm’s co-founder Bill Gross. And now PIMCO appears poised to replicate its success with managing mutual funds to ETFs.

The PIMCO 1-3 Year U.S. Treasury Index Fund (NYSEArca: TUZ) began trading yesterday. The fund focuses on U.S. Treasuries with short-term maturities and is benchmarked to the Merrill Lynch 1-3 Year U.S. Treasury Index. With maturities ranging from one to three years, price fluctuations may be low relative to longer-dated bonds, yet yields may be generally higher than shorter-term instruments such as Treasury bills or government money market funds.

PIMCO’s new ETF platform provides investors with broader access to investment management services,” said Mohamed A. El-Erian, PIMCO’s Chief Executive Officer and Co-Chief Investment Officer. “By launching our first ETF, PIMCO is diversifying the range of products that we offer to both long-standing and new clients around the world.”

ETFs are low-cost index funds that trade like stocks. They can be bought and held, shorted, leveraged with margin or hedged with options. Today, the bulk of ETF money is invested in funds that follow traditional indexes, although some see active management as a source of future growth.

While ETF assets are rapidly growing, they’re still tiny compared to mutual funds. According to the Investment Company Institute, there’s currently $9.69 trillion invested in mutual funds whereas just $540 billion in ETFs. Mutual funds have been able to hold their dominant position mainly because of their virtual lock in retirement plans like 401(k)’s.

TUZ has a temporary fee waiver which reduces its annual expense ratio to 0.09%. After two years, TUZ’s fund expenses are expected to have a small increase.

There are currently 14 U.S. government focused bond ETFs with average expense ratios of 0.16%. The majority of these funds are managed by Barclays Global Investors (iShares) and State Street Global Advisors (SPDRs). With just over $12 billion, the iShares Barclays U.S TIPS Fund (NYSEArca: TIP) is the largest among these.

PIMCO is expected to launch more ETFs to round out its suite of products. The firm was founded in 1971 and currently manages around $755 billion in assets.