PIMCO Launches Two New Bond ETFs (BABZ, CORP)

by on September 21, 2010 | ETFs Mentioned:

As the ETF world continues to expand at a tremendous pace, more and more traditional mutual fund companies are expanding ETF lineups in an attempt to capture a piece of a rapidly-growing pie. Bond fund giant PIMCO was late to the ETF game, but has made quite an impact since rolling out its first exchange-traded funds just last year. One of the world’s most prominent bond fund managers, PIMCO is perhaps best known for the Total Return Fund, which has close to $250 billion in assets and is by far the world’s largest mutual fund. However, in 2008 PIMCO registered with the SEC to enter the ETF market and now has 10 funds currently available to investors. Not surprisingly, these funds focus in on the company’s fixed income expertise, and now maintain more than $1.25 billion in aggregate assets. By far the most popular of the funds in the company’s lineup are the PIMCO 1-5 Year US TIPS Index ETF (STPZ) and the PIMCO Enhanced Short Maturity Fund (MINT), which together combine to hold more than $1 billion in assets for the California-based bond giant [see all of PIMCO's ETFs here].

No doubt encouraged by its early success in the ETF industry, PIMCO is looking to build up its ETF lineup, introducing today the PIMCO Build America Bond Strategy Fund (BABZ) and the PIMCO Investment Grade Corporate Bond Index Fund (CORP). The two new funds represent unique products for PIMCO, which until today did not have any ETFs targeting the Build America Bond market or the corporate bond market. Below, we profile both of the funds in greater detail in order to give investors a better understanding of the two new products [also read 2010: Year Of The Bond ETF]:

  • BABZ: This fund will offer investors an actively managed portfolio of Build America Bonds by investing at least 80% of its assets in taxable municipal debt securities publicly issued under the Build America Bond program. The Fund invests in U.S. dollar-denominated fixed income instruments that are primarily investment grade, but may invest up to 20% of its total assets in high yield securities rated B or higher. The average portfolio duration of BABZ will normally vary within two years (plus or minus) of the duration of the Barclays Capital Build America Bond Index (which as of July 31 was 12.60 years). The fund will charge an expense ratio of 45 basis points, putting it at the high end of ETFs targeting the municipal market [also read Three ETFs To Shield From Expiring 'Bush Tax Cuts'].
  • CORP: This fund will seek to replicate the BofA Merrill Lynch US Corporate Index. That underlying index consists of U.S. dollar denominated investment grade corporate debt securities publicly issued in the U.S. domestic market with at least one year remaining term to final maturity. The securities comprising the index have an investment grade rating and must trade in countries which possess an investment grade for their foreign currency long term sovereign debt ratings. CORP will charge an expense ratio of just 20 basis points, which puts it just below the 23 basis point average for the Corporate Bond ETFdb Category [also see PHB: Different Kind Of Junk Bond ETF]

Both BABZ and CORP will face some stiff competition from existing bond ETFs. There are currently two ETFs on the market offering exposure to the Build America Bond market, including PowerShares’ BAB and State Street’s BABS. The investment grade corporate bond space is even more crowded, with 20 funds covering this corner of the fixed income market. The largest of these is LQD, which has more than $14 billion in assets under management.

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Disclosure: No positions at time of writing.