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PIMCO ETF Open: Arbitrageurs Boosting Volume?

by Michael Johnston on June 3, 2009 | ETFs Mentioned: SHY • TUZ

In its first day of trading yesterday, PIMCO’s first ETF, the 1-3 Year U.S. Treasury Index Fund (TUZ), opened with a bang. While it would be foolish to read too much into one day’s activity, TUZ’s strong open must give the mutual fund giant hope that its entrance into the ETF arena will be a successful one.

TUZ opened at $50.31 yesterday, and while that level turned out to be its daily high (a fourth consecutive day of gains on Wall Street drove down Treasury prices), the launch was nevertheless a successful one. Despite closing down at $50.02, the ETF’s price wasn’t nearly as important as the volume of trading – more than 300,000 shares. PIMCO’s first ETF was launched into a space dominated by iShares (SHY is one of the largest bond ETFs on the market, with a market capitalization of more than $9 billion), causing many to wonder if the fund would face liquidity issues. At least on day one, the volume appeared to be sufficient to ensure investors or relatively narrow bid-ask spreads.

Day Traders Jumping In?

It’s interesting to note that SHY’s volume yesterday was approximately 2.2 million, nearly double its 3 month average and the highest daily volume posted since the end of March. Coincidence? I think not. It’s more likely that arbitrageurs swarmed into both TUZ and SHY yesterday, seeking to exploit small differences in two stocks with essentially identical underlying assets.

SHY's Volume Spiked on the Day of the PIMCO ETF Launch

Like I said though, one day isn’t enough to determine the fate of a fund, much less that of a fund sponsor. Stay tuned to see how TUZ’s volume holds up over the coming months.