Date Launched: Feb 2, 2010
Links: Website, Factsheet, Prospectus
Investment Strategy: (SMMU: 50.51 0.00%) looks to invest at least 80% of its assets (under normal conditions) in municipal bonds that provide interest income free from federal tax, in order to provide tax-exempt income alongside capital preservation. The fund may invest in US$ investment grade securities rated Baa or higher by Moody’s. The average duration of SMMU is not expected to be beyond 3 years. The fund also has restrictions on how much of the fund can be invested in municipal bonds that are financing similar projects. SMMU is benchmarked to Barclays Capital 1-3 Year Municipal Bond Index.
Portfolio Managers:
PIMCO serves as the investment manager of MINT. PIMCO has more than $940 billion in assets under management as of Sep 30, 2009 and over $75 billion in only short duration strategies.
John Cummings – Executive Vice President at PIMCO, joined PIMCO in 2002 before which he served as Vice President of Municipal Trading at Goldman Sachs. He has 28 years of investment experience.
Past Performance –
1. A comparative fund managed by PIMCO is the PIMCO Short Duration Municipal Income Fund A, run by John Cummings himself which also invests in investment grade municipal bonds with an average duration between 0-3 years. This fund has outperformed its benchmark the last 1-yr period but has underperformed in a 3-yr, 5-yr, 10-yr period as well as since inception.
The Numbers:
Expense Ratio – Capped at 0.35% till Oct 31, 2011 (by contractual agreement), 0.55% after that.
Average Volume – n/a
Average bid-ask ration: n/a
What’s special about it?
1. SMMU provides access to PIMCO’s proven investment process and expertise in the fixed-income market at a price that is less than the cost for investors putting money into the equivalent mutual fund mentioned above. For comparison sake, the expense ratio of the mutual fund is 0.73%.
2. Like other PIMCO Active ETFs, SMMU also does not utilize derivatives such as futures, options and swaps though that may well limit the fund’s ability to manage the risk of the portfolio, which is the purpose for which derivatives are usually utilized in ETFs.
Analysis:
Positives –
- With higher taxes expected in US in the years to come, being part of a portfolio that focuses on providing investors with tax-free income can be valuable, especially for higher tax-bracket investors, and PIMCO is easily the best name in the relatively small space of muni ETFs issuers.
- Unlike index bond ETFs, which depend on the rating agencies for credit analysis, PIMCO analyzes each municipality’s fundamentals and MUNI provides access to that expertise.
- The fund has started off with $8 million in seed capital, which is more than most issuers have been putting into new Active ETF launches and that may be a sign of the confidence PIMCO has in this ETF.
Negatives –
- With PIMCO’s other municipal bond ETF (MUNI) still trying to grain traction (its market cap is still only about $13 million), the challenge for SMMU will be to pull in enough investors and funds to provide sufficient liquidity for holders of the ETF.
Disclosure: No positions in mentioned names.
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