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Inside the 2 New Active Bond ETFs from PIMCO

Encouraged by the incredible success of the exchange traded version of its mutual fund – PIMCO Total Return Fund – the issuer has recently launched two such ETFs.

PIMCO’s recently launched actively managed ETFs – PIMCO Diversified Income Exchange-Traded Fund (DI) and the PIMCO Low Duration Exchange-Traded Fund (LDUR) – are exchange traded versions of fixed-income mutual funds.

Both employ a sampling technique. Also, the funds don’t employ any derivatives strategy including options, swaps and futures. Both the ETFs commenced trading on January 23.

DI in Focus

The fund gives exposure to a range of credit sectors including global investment grade and high yield corporate, emerging market debt and other global credit instruments (read: Market Vectors Launches High Yield Municipal Bond ETF).

The fund does not track an index and uses top down and bottom up strategies. The fund has 37 holdings and has garnered around $22.9 million to date.

The top ten holdings form around 40% of the total fund assets and none of the holdings occupy more than 4.5% of the basket.

Geographically, the fund has the highest exposure to the U.S. (43.07%) –the only country with double-digit exposure. This is followed by Mexico (9.05%) and Italy (8%). The fund has the least exposure to Peru (2.19%) and Columbia (2.06%).

The fund includes both corporate and government bonds. Corporate bonds with ratings ranging from AA+ to B- form a part of the portfolio.

While DI is an ETF version of the PIMCO Diversified Income Fund INSTL (PDIIX) mutual fund, there are some differences. The ETF has a slightly higher effective duration of 5.17 years compared to a 4.48 year reading for the mutual fund (read: Checking In On The PIMCO Total Return ETF (BOND)).

Moreover, the ETF charges 85 basis points as expenses as compared to 0.75% charged by PDIIX. However, the ETF is cheaper compared to PIMCO Diversified Income Fund A-Shares (PDVAX).

PDIIX has generated an average annualized 7.0% return over the past 10 years.

LDUR in Focus

LDUR provides exposure to high quality, short-term bonds including high quality bonds across the mortgage-backed, Treasury, corporate and international fixed income sectors.

The fund holds 30 bonds, having an effective maturity 2.40 years and effective duration of 2.36 years (read: AdvisorShares Launches New Low Duration Bond ETF).

The fund has an AUM of around $28 million. As far as holdings are concerned, the fund primarily invests in U.S. government bonds (more than 70% of the fund assets). However, the fund has low single-digit exposure to the U.K., Germany, Japan and Switzerland bonds.

While LDUR is the ETF version of the PIMCO Low-Duration Fund Institutional (PTLDX) mutual fund, the effective duration of 2.79 years for the mutual fund is higher than the effective duration of 2.36 years of the ETF. Also, the mutual fund charges 46 basis points as fees, cheaper than 57 basis points charged by the ETF.

How do they fit in a portfolio?

DI is a good choice for investors looking for diversified exposure in the bond space and at the same time seeking for an enhanced income potential (read: First Trust Launches 3 Innovative Income ETFs).

As far as LDUR is concerned, it is a perfect choice for investors willing to remain invested in the bond space, amid concerns over rising interest rates. The ETF provides exposure to high quality bonds and also its focus on low duration bonds tends to limit its interest rate exposure.


As LDUR primarily invests in U.S. Treasury notes having duration between 1 to 3 years, U.S. government bonds with short-term durations are its key competitors.

Though there are plenty of options in the U.S. Treasury space, iShares Barclays 1-3 Year Treasury Bond Fund (SHY) could be its biggest competitor with an asset base of $8.2 billion. Also, Short-Term Government Bond Index Fund (VGSH) and Short-Term U.S. Treasury ETF (SCHO) might be likely foes for this fund.

As far DI is concerned, iShares Intermediate Government/Credit Bond ETF (GVI) and Intermediate-Term Bond ETF (BIV) among others can be considered as somewhat close competitors.

Bottom Line

While both the funds have managed to accumulate a little above $20 million, these are quite pricey when compared to their peers as the funds are actively managed. LDUR is almost three times expensive and DI is almost four times expensive than their peers. Thus, the success of these funds depends on their performance, and their ability to generate alpha compared to their index-focused peers.

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Read the analyst report on DI

Read the analyst report on LDUR

Read the analyst report on PDIIX

Read the analyst report on PDVAX

Read the analyst report on PTLDX

Read the analyst report on SHY

Read the analyst report on VGSH

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