Have been impressed with PIMCO management of both BOND and PTTRX. Are these guys smart enough to avoid losses when, due to strengthening economy, the Fed starts raising interest rates? And what's a bond fund/ETF investor who's wary of stocks supposed to do? Go %100 to a money market fund?
With a duration of 4 years (on the low end for an intermediate term bond) a 1% rise in interest rates will cause a loss in principal of 4%. That is bond math. This loss of principal is reflected in the NAV. At the current point where the 10 yr bond is at 2.01% an increase of .01% in the 10 yr rate reduces the PTTRX NAV (which BOND is supposed to emulate) by .01. Note that this is not a linear relationship.
Some of these effects can be mitigated by purchasing floating rate bonds, buying TIPS (assuming the FED does not misreport true inflation), entering into floating for fixed swaps, currency swaps, puttable bonds and several other methods which we hopefully are paying Mr. Gross to think about.
In April 2011 when 10 yr interest rates were 2.37% PTTRX was trading at 10.9 from the yahoo charts. To give a sense about the loss that would occur from a roughly .37% increase in interest rates you would lose (11.18 - 10.9)/11.18 = 2.5% of your holdings. Now you will receive some dividend in the interim so on the whole you won't lose everything.
If the 10 yr interest rates rise to 4% instead of 2.37% in a short period of time from the current 2% you would lose about 8-10% of your money. I hope BOND and PTTRX are not comingled as the guys buying the ETFs appear to be retail investors who will be the first to stampede when they see this type of a drop.
Determining when to sell is difficult. Instead put a stop loss at the price where you feel you have locked in some amount of gain within your comfort zone. Every time I make a buy/sell decision based upon trying to read the market I bet wrong!
I think we're witnessing right now how reactive BOND is to slight interest rate fluctuations. This ETF has dramatically outperformed the index this past year; it's concerning it could go the other direction, too. Add to this a bull market (for the moment) with lots of sidelined money going that direction and likely cannibalizing the bond side of portfolios.
The advantage of BOND is that it's relatively small so the managers can steer it better than its giant counterparts. The disadvantage, as happened a couple years ago to Gross, is that the managers can steer it the wrong way.
The Morningstar site rates bond funds for rate hike sensitivity: BOND and PTTRX are rated quite sensitive whereas, for example, Doubleline (DBLTX), which I also own, is rated less sensitive.