REFILE-PIMCO to launch ETFs of 3 mutual funds amid yield hunt

Mon Apr 22, 2013 5:10pm EDT

By Jennifer Ablan

April 22 (Reuters) - Pacific Investment Management Co., PIMCO, the $2 trillion firm run by Bill Gross and Mohamed El-Erian, said on Monday that it will launch three actively managed exchange-traded funds that will share strategies similar to some of its existing bond funds.

The firm exited a quiet period on Monday for the PIMCO Diversified Income Exchange-Traded Fund, PIMCO Low Duration Exchange-Traded Fund and the PIMCO Real Return Exchange-Traded Fund, according to a filing with the U.S. Securities Exchange Commission.

The expected launch date for the new ETFs has not been set. They are being rolled out amid insatiable demand for yield given the persistently low-interest-rate environment and follow the successful launch of Gross' PIMCO Total Return Fund ETF .

BOND, which gathered more than $1 billion in its first three months, now has more than $5 billion in assets, according to PIMCO's website. The ETF is posting Net Asset Value returns (after fees) of 1.17 percent so far this year versus its big brother, the $289 billion Total Return mutual bond, returning 0.60 percent for the same period.

"The smaller portfolio would do better because it's easier to move the needle on a $5 billion fund rather than a $289 billion one," said Eric Jacobson, director of fixed-income research at Morningstar.

The Diversified Income strategy, which comes with a net annual expense ratio of 0.85 percent, will invest "under normal circumstances" at least 65 percent of its total assets in a diversified portfolio of fixed-income instruments of varying maturities, which may be represented by forward contracts. The strategy will also comprise debt securities from U.S. and non-U.S. issuers, both public and private-sector entities.

The average portfolio duration of the Diversified Income Fund will vary from three to eight years, based on PIMCO's forecast for interest rates.

The PIMCO Low Duration Exchange-Traded Fund, which comes with a net annual expense ratio of 0.55 percent, will also invest at least 65 percent of its total assets in a diversified portfolio of fixed income instruments but with an average portfolio duration from one to three years.

The filing said the fund invests primarily in investment-grade debt securities, but may invest up to 10 percent of its total assets in high yield securities ("junk bonds") rated B or higher by Moody's Investors Service, Inc., or equivalently rated by Standard & Poor's Rating Services or Fitch.

The fund also may invest up to 30 percent of its total assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. The fund will normally limit its foreign currency exposure (from non-U.S. dollar-denominated securities or currencies) to 20 percent of its total assets. The fund may invest up to 10 percent of its total assets in securities and instruments that are economically tied to emerging market countries.

For its part, the PIMCO Real Return Exchange-Traded Fund, which comes with a net annual expense ratio of 0.55 percent, seeks its investment objective by earmarking at least 80 percent of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and corporations.

Inflation-indexed bonds are fixed income securities that are structured to provide protection against inflation. The value of the bond's principal or the interest income paid on the bond is adjusted to track changes in an official inflation measure. The U.S. Treasury uses the Consumer Price Index for Urban Consumers as the inflation measure.

The fund invests primarily in investment-grade securities, but may invest up to 10 percent of its total assets in junk bonds rated B or higher by Moody's Investors, or equivalently rated by S&P or Fitch.

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