TIPS From PIMCO: Bond Giant’s Latest ETF Offering

by on August 24, 2009 | ETFs Mentioned:

Pimco, which made major waves when it launched its first exchange-traded fund in June, has introduced its second fund, the Pimco 1-5 Year U.S. TIPS Index Fund (STPZ). When Pimco filed to launch its 1-3 Year U.S. Treasury Fund (TUZ), it also filed for approval on six additional indexed ETFs, including:

  • Investors Concerned About Inflation May Be Interested In The New Pimco ETF3-7 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

Not surprisingly, Pimco has elected to launch the short maturity U.S. TIPS product as its second ETF. With concerns about the intermediate- and long-term impacts of the massive stimulus plans implemented by the U.S. and other developed nations, many investors are bracing for a wave of inflation (we’re not talking about the just the high end of the Fed’s “comfort zone” either).

The TIPS ETF arena is already a crowded one, with iShares (TIP) and State Street (IPE) both offering funds holding inflation-protected Treasuries. But the new Pimco product will differentiate itself from existing ETFs in a few ways. First, the fund will invest in short duration bonds, whereas TIP and IPE currently have durations of about 8 years. As such, the new ETF will also protect against rising interest rates, another fear of investors as the recovery progresses and many key rates remain well below historical levels.

Also, the new Pimco fund will track an index maintained by Merrill Lynch, whereas existing funds are based on Barclays benchmarks.

Fund Ticker Market Cap Index Provider Duration Expense Ratio
Pimco 1-5 Year U.S. TIPS Fund STPZ n/a Merrill Lynch 1-5 Years 0.20%
iShares Barclays TIPS Bond Fund TIP $15.2 billion Barclays 9.2 Years 0.20%
SPDR Barclays Capital TIPS ETF IPE $301 million Barclays 9.4 Years 0.18%

Pimco’s initial ETF offering also went head-to-head with an existing iShares ETF (SHY). While TUZ still pales in comparison to the size of its closest competitor, it has received a very good reception from investors, and now has a market capitalization of more than $45 million. Unlike its initial fund, which undercut the expense ratio offered by a comparable iShares fund, STPZ will charge fees in line with its competitors. Perhaps the bond giant has been encouraged by the success of TUZ, and believes its new fund will thrive based on the Pimco name and the star power behind it.

More To Come

The Newport, California-based issuer is also planning to offer additional TIPS ETFs in the near future. Pimco expects to launch the Broad U.S. TIPS Index Fund (TIPZ) and 15+ Year U.S. TIPS Index Fund (LTPZ) within the next month, according to Index Universe.

Pimco has also filed for approval on several actively-managed bond ETFs, which would be the first of their kind. Given the track record and wide following of Pimco co-founder Bill Gross, it seems like only a matter of time before the firm begins to dabble in the active ETF space. No timetable for the launch of actively-managed funds is known.

Disclosure: No positions at time of writing.