As from Monday January 24, the first two fixed income ETFs issued by PIMCO Source in Europe can be traded worldwide on Deutsche Boerse’s Xetra. The two ETFs are the PIMCO Euro Enhanced Short Maturity Source ETF (TER 0.35%) and the PIMCO European Advantage Government Bond Index Source ETF (TER 0.30%). Both ETFs are domiciled in Ireland, use physical replication, and will be distributing dividends on a monthly basis. They are UCITS III compliant and have been passported to a large number of European countries. They have also applied for UK reporting status.
As we had anticipated back in December when the PIMCO Source partnership was announced, the Euro Enhanced Short Maturity Source ETF is a European version of the very popular US Enhanced Short Maturity Strategy Fund, commonly known by its ticker MINT. This is an actively managed ETF aimed at exceeding the performance of the reference benchmark, in this case EONIA (i.e. the overnight reference rate for the euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system). The portfolio manager is PIMCO’s Andrew Bosomworth.
With this ETF, PIMCO Source aims to attract investors in need of a cash equitisation vehicle, but frustrated at the very poor returns offered by the current offering of money market ETFs in the European market. The fund’s investment objective is rather simple: enhancing returns above EONIA by investing in a higher-yielding mix of corporate and government bonds with short residual maturity. The price for higher returns and active management of the fund comes in the shape of a comparatively high TER of 0.35% vis-à-vis the 0.05-0.15% range charged by most eurozone money market ETFs in the marketplace.
According to data provided on the Source website, the fund is made up of 49 components, of which 72.6% are corporate bonds, 19.7% are government bonds, 3.8% are covered bonds and 3.8% are euro cash holdings. As per the maturity distribution, 57% of holdings are up to one year, over 38% between one and three years and the remaining 5% above the three-year mark. All components are EUR-denominated with individual weightings ranging from 0.86% to 5.33% of the fund. The bulk of corporate bonds in the fund are issued by German, Nordic, UK and US companies. The bulk of government and covered bonds are from AAA sovereigns and/or government agencies. There is testimonial exposure to eurozone peripheral sovereigns in the shape of Italian CTZ (e.g. zero-coupon bonds with maturity at launch of two years which are traditionally targeted to the Italian retail investor community).
The second fixed income ETF from PIMCO Source now available for trading on Xetra is the PIMCO European Advantage Government Bond Index Source ETF. The fund’s manager will be PIMCO’s Vineer Banshali. The key selling point of this ETF is that it offers investors exposure to the eurozone government bond market by tracking the PIMCO European Advantage Government Bond Index, a GDP-weighted rather than market-capitalisation-weighted benchmark that tracks investment grade (i.e. it excludes Greece) EUR-denominated fixed-rate eurozone government bonds.
This index was launched in July 2010 with the objective of addressing one of the most commonly cited pitfalls of fixed income indices, namely the overweighting of highly indebted countries (e.g. Italy, Belgium). This, amongst other shortcomings with fixed income indices, was addressed by Morningstar in The Trouble with Fixed Income Indices. Eligible bonds must have a minimum outstanding of EUR 2 billion and remaining maturity of at least 12 months.
As far as we are aware, the PIMCO European Advantage Government Bond Index Source ETF will be the first fixed income ETF in the world to be linked to a GDP-weighted index. But as is the case with the Euro Enhanced Short Maturity Source ETF, the price to pay for the benefits of innovation come in the shape of a higher TER of 0.30% vis-à-vis the 0.12-0.20% range charged by ETFs offering exposure to the eurozone government bond market.
