Bond giant Pimco launched its first exchange-traded fund this morning, with the debut of the Pimco 1-3 Year U.S. Treasury Index Fund (NYSE Arca: TUZ) on NYSE Arca.

Bond giant Pimco launched its first exchange-traded fund on Tuesday with the debut of the Pimco 1-3 Year U.S. Treasury Index Fund (NYSE Arca: TUZ) on NYSE Arca.

The Newport Beach, Calif.-based asset manager originally filed to enter the ETF market last July, targeting an intermediate-term bond index (see related story here). A few months later as markets were heavily stressed by the ongoing credit crisis, Pimco decided to go with the short-term Merrill Lynch Treasury benchmark to base its first ETF on. (See related story here.) 

TUZ will charge just 9 basis points (0.09%) in expenses, reflecting a 0.13% fee waiver that is contractually in place for at least a year. At 0.09%, TUZ becomes the lowest-cost fixed-income ETF on the market, undercutting the previous low-cost leaders, the Vanguard Short-Term Bond ETF (NYSE Arca: BSV) and the Vanguard Total Bond Market ETF (NYSE Arca: BND), by 2 basis points (0.02%).

“Our objective is to offer investment products that are competitively priced,” said Tammie Arnold, managing director and head of global wealth management for Pimco. ”In the case of TUZ, we’re offering a temporary fee waiver that brings down the ER for at least two years. That’s an acknowledgment of the current level of yield at the short part of the curve.”  

Currently, the largest direct competitor for TUZ is the iShares Barclays 1-3 Year Treasury Bond ETF (NYSE Arca: SHY), which has $7 billion in assets and charges management fees of 0.15%. If TUZ can attract sufficient liquidity to support low-cost trading, it will be a serious challenger to SHY.

PIMCO also says that its ETFs are designed with a focus on creating an ultra-liquid underlying basket, to help ensure that the ETF is easy for market-makers to hedge, which should help keep the fund’s share price in line with its net asset value.

“We’ve been very thoughtful in the selection of bonds that will populate the portfolios, to ensure that the liquidity of the underlying securities is robust,” said Don Suskind, head of Pimco’s ETF product team. “That should translate into liquidity for the ETF itself.” 

In related news, Pimco also filed papers with the Securities & Exchange Commission to launch six additional fixed-income ETFs:

•  Pimco 3-7 Year U.S. Treasury Index Fund
•  Pimco 7-15 Year U.S. Treasury Index Fund
•  Pimco 15+ Year U.S. Treasury Index Fund
•  Pimco Broad U.S. TIPS Index Fund
•  Pimco Short Maturity U.S. TIPS Index Fund
•  Pimco Long Maturity U.S. TIPS Index Fund

The last two would be the first ETFs to break the TIPS market into short- and long-term categories. Currently, all existing TIPS ETFs (such as the iShares Barclays TIPS Bond Fund (NYSE Arca: TIP)) simply provide broad exposure to the TIPS market.

The filing is available here. 

There is no word yet on when the additional funds will launch. The filing confirms, however, that Pimco is making a significant move into the ETF market, and aims to present a full slate of fixed-income offerings to the ETF market.

The company has more than 30 years’ experience managing fixed-income mutual funds, and is the largest fixed-income manager in the world. Arnold says the company would leverage its existing distribution capabilities to push the ETFs out into both the institutional and retail markets.

“The segment that is newly accessible to us with ETFs is the institutional money manager segment, and we’re excited about tapping into that market,” he said. 

– This article was submitted by IndexUniverse.com’s Matthew Hougan. 

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