PIMCO ETF On Solid Ground: Ready To Challenge iShares?

by on July 1, 2009 | Updated August 24, 2009 | ETFs Mentioned:

At the beginning of June, Newport, California-based Pacific Investment Management Company (PIMCO) made waves in the ETF industry by launching its first exchange-traded fund, the 1-3 Year U.S. Treasury Index Fund (TUZ). While new ETFs are a common (seemingly weekly) occurrence in the industry, PIMCO’s launch drew a significant amount of attention because it represented the initial foray into the ETF space of one of the largest and best-known fixed income managers in the world. In its first month of trading, TUZ has been well received by investors, attracting significant funds and generating sufficient trading volumes to ease any fears of illiquidity. Now, given the success of its initial fund, PIMCO may soon be ready to add more ETFs to its lineup.

TUZ closed Tuesday at $49.96, down very slightly from its initial opening price on June 2 and in line with its underlying index, the Merrill Lynch 1-3 Year U.S. Treasury Index. But more indicative of a new fund’s success is its volume. During the month of June, TUZ maintained an average daily volume of more than 27,000 shares, just above the all-important 25,000 share mark that is generally deemed to be a good indication of sufficient liquidity in a fund. And over the last five trading sessions, volume averaged more than 41,000 shares, indicating that liquidity has improved since the fund’s launch. TUZ faces the challenge of competing with a much bigger, well-established rival, in this case iShares‘ 1-3 Year Treasury Bond Fund (SHY). SHY has a market capitalization of more than $7 billion and boasts an average daily trading volume in excess of 1.1 million shares. The early success of TUZ is partially attributable to its expense ratio – a measly 9 basis points, 0.06% lower than SHY.

More Funds On Deck?

When it launched TUZ, PIMCO also filed for six additional indexed ETFs, including:

  • 3-7 Year Treasury Index Fund
  • 7-15 Year Treasury Index Fund
  • 15+ Year Treasury Index Fund
  • Broad U.S. TIPS Index Fund
  • Short Maturity U.S. TIPS Index Fund
  • Long Maturity U.S. TIPS Index Fund

PIMCO founder Bill Gross is regarded as one of the world’s premier bond fund managers, leading to widespread speculation that the firm’s entry into the passively-indexed ETF arena would serve as the precursor to a launch of the first actively-managed bond ETF. While we haven’t heard much news on this front since the initial TUZ launch, perhaps the fund’s success will encourage the bond giant to push further into the ETF industry. Currently there are approximately 65 fixed income ETFs on the market with total assets of $75 billion. iShares is the dominant player in the fixed income ETF space, responsible for 12 of the 17 funds with a market capitalization greater than $1 billion.

The next logical move for PIMCO seems to be the launch of a TIPS ETF. Given the massive government debt and recent injections of money, more and more investors are worried about runaway inflation (as in 10%) being the next hurdle for equity markets in developed countries. iShares currently has a stranglehold on the TIPS market, as its Lehman TIPS Bond Fund (TIP) is one of the largest ETFs on the market. But PIMCO has already proven it can hold its own going head-to-head with iShares, drawing on its lower cost structure and the cache that comes with the PIMCO (and Gross) name.

Disclosure: No positions at time of writing.