PIMCO Proposes Three Developed Market Bond ETFs

by on August 5, 2011 | ETFs Mentioned:

PIMCO, the bond giant that has begun to make large inroads in the fixed income ETF world, announced plans for three more funds in this quickly growing space with its latest SEC filing. In the document, the issuer laid out plans for products targeting the total bond market in three developed market countries; Germany, Canada, and Australia. While these nations may not have much in common from a geographic perspective, they are all exporting powerhouses that have budget situations that are relatively under control. Furthermore, unlike many other industrialized nations, these three have few worries in terms of credit downgrades making them stable choices for bond investors. Although expense ratios and ticker symbols were not available for any of the proposed funds, we have highlighted some of the key details from the filing below: 

PIMCO Australia Bond Index Fund- This proposed product will track the BofA Merrill Lynch Diversified Australia Bond Index which looks to offer investors broad exposure to the Aussie bond market. The index tracks investment grade bond issues in the country that are denominated in Australian dollars and have at least one year remaining until final maturity. Sovereign bonds must also have at least one billion in Australian dollars worth of securities outstanding in order to be included, so that ample liquidity can be assured. This fund could be an interesting choice for investors who believe in continued growth in Asian markets and are expecting commodity demand to stay high for the foreseeable future. The product could also provide a nice way to diversify out of dollar assets while at the same time paying out higher yields than many other EAFE markets. With that being said, an Asian slowdown could hurt this fund more than most while further increases in rates could hurt the capital gain experience in some of the longer dated bonds in this fund [see all the ETFs that offer exposure to Australia].

PIMCO Canada Bond Index Fund- This fund looks to follow the BofA Merrill Lynch Diversified Canada Bond Index which could give investors broad bond exposure in the Canadian bond market. This fund will only focus on investment grade bonds that are issued in Canadian dollars and are in one of the following categories; sovereign, quasi-government, corporates, and securitized and collateralized notes. This fund could be appropriate for investors seeking a safe and stable economy that is developed but still a commodity powerhouse. In addition to agricultural products, Canada is a major oil exporter so strength in crude prices could boost this fund and would especially help the loonie to appreciate against the dollar. One thing to remember about Canada is that the country is still heavily dependent on the American economy as a vital trading partner. In fact, close to three-fourths of the country’s exports go to the U.S. so a further slowdown in the American economy could hurt some of the corporate issues more than most [see all the ETFs that offer exposure to Canada here].

PIMCO Germany Bond Index Fund- Much like the other counterparts in this filing, this ETF will follow the BofA Merrill Lynch Diversified Germany Bond Index which gives investors access to the Germany bond market. Sovereign securities must have a minimum amount outstanding of one billion euros in order to ensure adequate liquidity, but beyond that, this fund shares a lot of similarities with the Australia and Canada funds. This product only includes investment grade debt of German issuers that are denominated in euros and have at least one year remaining until final maturity as well as a fixed coupon schedule. Although Germany doesn’t have the same benefits of commodities that the other two countries do, the European nation remains the industrial powerhouse of the continent and is the world’s second biggest exporter, behind only China. Thanks to this prowess, the country is able to skirt economic issues better than most and has far less worries in terms of employment and growth. While German bonds may be stable, the yield gained from these funds may be quite poor, especially if further turmoil hits euro zone markets. Additionally, if the euro declines against the greenback, many of the gains from capital appreciation may be wiped out by this currency fluctuation [also see Country Specific Bond ETNs Debut].

If approved, the three funds will bring PIMCO’s total lineup up to 18 ETFs and will be the first products to target international markets for the California-based company in the ETF space. While these products could see a great deal of interest from investors looking to further diversify their fixed income holdings across currencies and borders, many investors are likely focused on the future release of the PIMCO Total Return ETF (TRXT). This product, which is still working its way around regulatory hurdles, looks to employ the same bond selection methods that its mutual fund counterpart of the same name uses. That particular mutual fund is the world’s most popular bond offering and, along with the three proposed funds outlined above, could help to further push the company over the $3 billion mark for ETF assets under management [Discussing The PIMCO Total Return ETF With Todd Rosenbluth].

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Disclosure: No positions at time of writing.