Q: Why create an ETF version of PIMCO’s Total Return strategy?
Gross: PIMCO’s primary focus has always been how we can best serve our clients, and launching the Total Return ETF continues that commitment. A growing number of investors have been looking to exchange-traded funds, which offer a different value proposition than traditional vehicles. Many people like their ease of use, the accessibility through the stock market, transparency and low investment minimums. For others – institutions or financial advisors, for example – ETFs may represent a better operational fit. PIMCO Total Return ETF, or BOND, as it is known by its ticker, provides these investors with a point of access for an ETF version of an established, actively managed strategy that has been around for more than a quarter century.
Q: Do BOND and the Total Return strategy mirror each other?
Gross: Our flagship Total Return strategy and its new ETF counterpart have many similarities, and a few key differences. They share the same overarching objectives and investment strategy, rely on the same investment process and have much the same flexibility. However, there are some differences in terms of portfolio holdings. For example, in line with regulatory requirements, the ETF won’t use options, futures or swaps. Other factors, such as the timing of cash flows, can also influence portfolio construction. Beyond these, though, the management approach and philosophy of BOND and the Total Return strategy will be nearly identical, and I will be managing both.
Q: Any other differences between BOND and Total Return to note?
Gross: Both BOND and the Total Return strategy are benchmarked to Barclays Capital U.S. Aggregate Index, which includes corporates, mortgages and Treasuries. While we can’t comment on specific return expectations, I will say that we believe that a broad opportunity set, coupled with the ability to be nimble as market conditions change, supports better potential for excess returns. I think it would be reasonable to anticipate some short-term divergence between the ETF and Total Return. However, the similarity of their approaches means that over longer periods we would expect outcomes to be well in line with each other.
Q: Does the transparency of the ETF vehicle affect your management approach?
Gross: We recognize that for many investors, the transparency of the ETF vehicle – specifically, daily disclosure of holdings, performance and assets under management – is a very attractive feature. In fact, the Total Return strategy is already quite transparent. Certainly, the market knows what we’re doing within the first few days of each month, when we release our sector holdings. So we’re not worried about the ETF structure exposing our “secret sauce.” Where we believe we can make a difference is in our active management. PIMCO’s investment approach is distinctive, no matter which vehicle it’s expressed in. For one thing, it’s based on underlying risk factor exposures rather than simple sector weightings, which we believe provides us with greater flexibility to implement our investment views and trade strategies.
Q: What is your strategy for BOND in the current market environment?
Gross: We are positioning BOND to address what we are calling a bimodal world of greater uncertainty and fatter tails – one that presents both “right-tail,” or inflationary, outcomes and “left tail,” or deflationary, risks. (“Tails” refer to the way a distribution of potential market outcomes look on a bell curve.) Given the unpredictability of the current market, we are generally “risk off” and focused on protecting principal, with an emphasis on what we call “cleaner dirty shirts.” These are sovereign debt of countries we feel have relatively healthy balance sheets and the ability to print their own currencies, including the U.S., Canada and the U.K. At the same time, as short-term rates are expected to remain zero-bound for at least the next several years, we are extending duration into the intermediate, five- to 10-year section of the yield curve, which we believe provides us with opportunities for capital appreciation through “roll down” (returns gained when a bond approaches maturity). In our view, this type of environment really highlights the strength of PIMCO’s time-tested investment process, which is built on the top-down outlook we develop at our secular and cyclical forums, our daily Investment Committee meetings and our global credit research. As with all of our offerings, BOND draws on this process to help navigate through today’s highly uncertain markets.
Q: Where is PIMCO headed with its ETF business?
Gross: PIMCO has a long tradition of innovation, as we try to provide clients with the strategies and products they need to help them achieve their complex, evolving objectives. We launched our first exchange-traded funds in 2009 and have continued to broaden our suite of “smart passive” strategies – these offerings incorporate credit analysis to screen out securities that are illiquid or that don’t pass other key risk metrics – as well as actively managed strategies, both in a vehicle that has become increasingly useful for many investors. BOND builds on that tradition of innovation. We expect to continue to expand our offerings, harnessing the power of our investment process to pursue superior risk-adjusted returns for clients.
Q: Why did PIMCO change the ticker to BOND?
Gross: We believe that re-naming the NYSE ticker to BOND is another step toward making the PIMCO Total Return ETF more accessible. The ticker BOND will be easy for investors to remember.
Thank you, Bill.