PIMCO plans to launch an active currency ETF designed for investors who want to protect against a devalued U.S. dollar with the bond giant’s expertise in global markets.
The ETF will invest in foreign currencies and is expected to list on the NYSE Arca on Tuesday with the ticker FORX. The fund will charge a management fee of 0.65%, according to the prospectus.
It will be called PIMCO Foreign Currency Strategy ETF.
PIMCO is putting the ETF together for investors who want to diversify with currencies if the U.S. dollar depreciates, said Don Suskind, head of global ETF product management, in a telephone interview Monday.
The fund will be actively managed so it won’t use market-cap-weighting schemes common in many passive indices.
The ETF will hold currencies “we believe make the most sense for investors,” Suskind added. It will invest in both emerging and developed markets, although its exposure to emerging markets will be capped at 50%.
PIMCO Total Return ETF (NYSEArca: BOND) manager Bill Gross at last month’s 2013 ETF Virtual Summit announced the firm had an actively managed currency fund in the works.
Gross said most currencies are yielding less than inflation due to central bank stimulus, although there are some exceptions such as Mexico and Brazil.
“A currency fund these days can be very attractive because central banks are repressing investors around the world,” Gross noted in January. “That’s what we hope to exploit – find central banks that run the printing press at the slowest rate. There are central banks playing by the rules with more conservative policies. These currencies can appreciate relative to the dollar.”
Hedging a weaker dollar
FORX will invest in fixed-income instruments denominated in currencies of non-U.S. countries, according to the prospectus. These may be money market securities and currency forwards backed by high-quality, low duration securities.
“Elevated debt levels, accomodative monetary policy, and limited fiscal flexibility in the U.S. are creating an environment and policies that are likely to weigh on the U.S. dollar for years,” according to a PIMCO fact sheet on FORX. “Global currencies may be an important liquid alternative asset class and may help hedge portfolios from a declining dollar, enhance diversification, preserve purchasing power and seek return. FORX provides direct access to PIMCO’s global bond and currency portfolio management expertise in a highly transparent, publicly listed actively-managed ETF.”
The ETF is designed to provide a purer “anti-dollar” strategy than gold, single currency investments, or international equities, which may introduce other unintended risks, it added.
Specifically, PIMCO will target currencies “likely to outperform the U.S. dollar over the long-term.”
The ETF will be managed by Scott Mather, Vineer Bhansali and Thomas Kressin.
The managers will chose currencies based on relative interest rates, inflation rates, exchange rates, monetary and fiscal policies, trade and current account balances, legal and political developments and other specific factors.
The ETF will aim for a portfolio duration of under three years. It may invest in both investment grade securities and high yield securities.
FORX will limit its exposure to any one currency to 20% of the portfolio.
“The ongoing transition away from the dollar as the preeminent global reserve currency is continuing and many competing currencies increasingly offer better yields and long-term credit dynamics,” said Mather, one of the PIMCO co-portfolio managers, in a press release. “FORX is a purer way to gain foreign currency exposure and also avoids the unwanted exposures that can come with holding indirect currency plays such as equities or commodities.”
Full disclosure: Tom Lydon’s clients own BOND.