Mortgages, Treasuries Weigh on PIMCO Gross ETF in May

ETF Trends

The PIMCO Total Return ETF (BOND) , by far the largest actively managed ETF with over $5 billion in assets under management, had a May to forget. The $293 billion PIMCO Total Return Fund, the mutual fund that inspired BOND, had it bad last month as well, losing 1.9%. However, BOND fared a bit worse with a May decline of almost 2.5%.

The performance of the $293 billion Total Return Fund puts it behind 94% of similarly managed funds through May 30, according to Bloomberg. Both the mutual fund and the ETF were done in by exposure to U.S. Treasurys, an asset class that was punished by surging yields last month.

Still, the active PIMCO ETF remains well ahead of its benchmark for the trailing 12 months.

BOND was also hurt last month by its significant exposure to mortgage-backed securities. Those bonds account for 38% of the ETF’s market value and 36% of its duration, according to PIMCO data.

Speculation that the Federal Reserve is mulling winding down or an outright end to its asset-buying activities weighed on mortgage-related securities last month as well. Low interest rate MBS are among the assets the Fed has been buying. Mortgage-backed securities also are the most vulnerable to rising benchmark rates because the underlying loans aren’t likely to be refinanced. [Mortgage REIT ETFs Hit by Fed Tapering Chatter]

Treasurys account for 24% of BOND’s market value and 36% of the ETF’s duration, according to PIMCO data. Most of BOND’s holdings are of medium maturity with bonds maturities of three to five and five to 10 years combining for 59% of the ETF’s weight. [The Actively Manged ETF Landscape]

Although BOND, assuming no significant changes to its duration, would be vulnerable if rates suddenly spike, Gross is not a fan of the Federal Reserve’s low interest rate policy. In his monthly investment outlook, Gross said “Low yields, low carry, future low expected returns have increasingly negative effects on the real economy . Granted, Chairman Bernanke has frequently admitted as much but cites the hopeful conclusion that once real growth has been restored to “old normal”, then the financial markets can return to those historical levels of yields, carry, volatility and liquidity premiums that investors yearn for.”

It is hard to deny that BOND has not benefited from the Fed’s asset-buying programs as the ETF has jumped 8% since its debut. However, that is obviously more a case of Gross playing the cards dealt to him by Bernanke, not an endorsement of the Fed’s policies.

“Perhaps when yields, carry and expected returns on financial and real assets become so low, then risk-taking investors turn inward and more conservative as opposed to outward and more risk seeking. Perhaps financial markets and real economic growth are more at risk than your calm demeanor would convey,” Gross went on to say about Bernanke.

Those may sound like fighting words, but chances are Gross will find a way to deal with whatever the Fed throws at him and BOND investors will benefit.

BOND is lagging the Barclays US Aggregate Bond Index for the trailing month but outperforming year to date. For the trailing year, the PIMCO ETF is up 5.6% versus 0.8% for the benchmark.

PIMCO Total Return ETF

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ETF Trends editorial team contributed to this report. Tom Lydon’s clients own shares of BOND.

 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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