Investing

Pimco’s latest ETF shields against price spikes

Bond giant launches second active ETF; this one apes $23B Real Return Fund

Pacific Investment Management Co. LLC celebrated the two-month anniversary of the launch of the active-ETF version of the Pimco Total Return Fund Ticker:(PTTAX) on Tuesday by launching a global version of its $23 billion Pimco Real Return Fund Ticker:(PRTNX) — in ETF form, of course.

The Pimco Global Advantage Inflation-Linked Bond Strategy Fund Ticker:(ILB) will invest in inflation-linked bonds across the globe, whereas the Real Return Fund primarily invests in Treasury inflation-protected securities.

“We’re concerned that today’s monetary policies, which were essential in 2008 to provide stability, could lead to something we don’t anticipate, like inflation,” said Mihir Worah, head of Pimco’s real-return portfolio management team.

“Globally, inflation should be less this year than it was last year,” Mr. Worah said. “To us, that means inflation isn’t in the front of people’s minds, and that makes the valuations on inflation-linked bonds attractive. Inflation-linked bonds are like an insurance policy; you don’t want to buy them after everyone sees inflation coming.”

The ETF will use a proprietary benchmark that weights countries by their global gross domestic products, rather than by bond issuance. As a result, the benchmark has a 25% weighting to TIPS, as opposed to the 40% it would have based on market capitalization alone, Mr. Worah said.

“Traditional market-cap weightings give the most weight to the countries that issue the most bonds,” he noted. “We said, ‘Let’s focus instead on the countries that are most important to the global economy.’”

Emerging markets, which make up 30% of global GDP, get a bigger role in the portfolio as a result of the alternative weighting scheme. Brazil and Mexico, for example, are the second- and third-largest holdings after the U.S.

In comparison, the iShares Global Inflation-Linked Bond Fund Ticker:(GTIP) has the U.K. as its second largest holding.

Since the ETF is actively managed by Mr. Worah and his team, it is not expected to track the benchmark. Mr. Worah said the goal is to outperform it by 100 to 150 basis points a year.

The launch of the ETF comes exactly two months after Pimco unleashed its Total Return ETF Ticker:(BOND) on the public. Over that time, the Total Return ETF has amassed more than $600 million in assets.