Pimco TIPS the Competition

NEW YORK (TheStreet.com) -- The Pimco 1-5 Year U.S. TIPS Index Fund (STPZ) has joined competitors like the Barclays TIPS Bond Fund (TIP) in offering investors protection from inflation.

While hard economic data has yet to support inflation fears, many investors are looking to get behind the eight ball. Investors have shown a growing interest in Treasury Inflation-Protected Securities (TIPS) and vehicles that provide exposure to them.

"At PIMCO, we agree with this shift in strategic focus," the company noted in a recent release about the use of TIPS. "At our 2009 Secular Forum, in which we developed our longer-term three- to five-year outlook, one of our conclusions was that the domestic economy will likely have to deal with heightened inflation expectations, with the longer-term balance of inflation risk biased to the upside."

America is aging and baby boomers are becoming increasingly concerned about getting by on a fixed income. These investors are especially concerned about the effects of inflation on their portfolios. Whether inflation fears take shape or not, PIMCO wants to be ready. It has identified the hunger for TIPs ETFs and wants part of the action.

STPZ joins the lineup beside an already-popular competitor. TIP has been one of the biggest success stories for iShares in 2009. TIP and the iBoxx $ Investment Grade Corporate Bond Fund ( LQD) have been the biggest asset gatherers for iShares so far this year.

This isn't the first shot that PIMCO's fired across iShares' bow. PIMCO's initial fixed-income product, the 1-3 Year U.S. Treasury Index Fund ( TUZ), is squarely aimed at iShares Barclays 1-3 Year Treasury Bond ( SHY). Rather than reinventing the wheel, Pimco decided to make a cheaper one. TUZ has an expense ratio of 0.09% while SHY has expenses of 0.15%, according to Morningstar ( MORN).

STPZ and TIP both have expense ratios of 0.20%, but Pimco's offering is more focused. TIP is based on the Barclays Capital ( BCS) U.S. Treasury Inflation-Protected Securities (TIPS) Index, which contains all TIPs securities with at least one year until maturity. STPZ tracks the more time-sensitive Merrill Lynch ( BAC) 1-5 Year U.S. Inflation-Linked Treasury Index.

PIMCO has plans to launch two more TIPs ETFs in September. The Pimco 15+ Year U.S. TIPS Index Fund and PIMCO Broad U.S. TIPS Index Fund offer focused exposure to TIPs and capture the spirit of the ETF industry.

As the ETF industry has grown, ETF issuers have found increasing success with focused products. Rather than simply offering a commodity ETF, issuers offer individual metals and agricultural products. This same pattern is emerging with TIPs funds. TIP has raked in a huge amount of assets for iShares and other issuers are looking for ways to capitalize on the idea.

The STPZ fact sheet argues that a short maturity TIPS index had less interest rate risk and exhibited higher correlation to inflation and lower volatility than the index that TIP tracks.

The new PIMCO funds will take time to garner investor interest and build trading volume. During this period, the funds could be volatile. Investors who are sure of their inflation time horizon may want to consider STPZ now, while longer-term investors are better off sticking with TIP.

-- written by Don Dion in Williamstown, Mass.

At the time of publication, Dion was long TIP and SHY.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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