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Pimco Strides Into Competition for Bond ETFs

By Eric Dutram of ETFdb

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 game, registering with the SEC as recently as 2008 to enter the market and rolling out its first exchange-traded funds just last year. But it has made quite an impact since.

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. Its first 10 ETFs not surprisingly focused 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 1-5 Year US TIPS Index ETF (STPZ) and Enhanced Short Maturity Fund (MINT), which together combine to hold more than $1 billion in assets for the California-based bond giant.

No doubt encouraged by its early success, Pimco is looking to build its ETF lineup further, introducing this week the Build America Bond Strategy Fund, or BABZ, and Investment Grade Corporate Bond Index Fund, or CORP. The two represent unique products for Pimco, which until this week did not have any ETFs targeting the Build America Bond market or the corporate bond market.

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.

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 to final maturity. The securities making up the index have an investment-grade rating and must trade in countries with 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.

Both funds will face stiff competition from existing bond ETFs. There are 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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At the time of publication, Eric Dutram had no positions in the securities mentioned. ETF Database is not an investment adviser, and any content published by ETF Database does not constitute individual investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.

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