SEC Allows PIMCO to Trade Derviatives in BOND ETF

August 8th at 3:28pm by Max Chen

PIMCO’s exchange traded fund adaptation of the flagship Total Return Fund could soon better mirror its mutual fund counterpart as the Securities and Exchange Commission gives the go ahead for derivatives usage.

According to a recent filing, the SEC granted approval of proposed rule changes to modify the PIMCO Total Return ETF (NYSEArca: BOND), an actively managed ETF version of PTTRX, to include derivative instruments.

The SEC had previously issued a blanket ban on derivatives in new ETF filings due to concerns over risk exposure. However, the regulatory body lifted the freeze on active ETFs but remains wary about approving other applications from other providers. [SEC Delays Approvals for Active ETFs with Derivatives]

PIMCO has maintained that derivatives “can be an economically attractive substitute for an underlying physical security that the [ETF] would otherwise purchase” by offering lower transaction costs or better valuations, reports Jackie Noblett for Ignites.

However, some wonder if PIMCO even needs or will use derivatives in the ETF

“The absence of the ability to use all of the tools in PIMCO’s toolbox hasn’t hurt this year,” Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, said in the article.

BOND has outperformed its mutual fund counterpart over the past year, rising 5.4%, compared to the 4.2% gain in PTTRX.

Since launching in 2012, BOND has only been able to utilize forward contracts. According to PIMCO, futures, options and swaps are prohibited. Rosenbluth argues that the Total Return Fund requires derivatives to limit its effect on the market because of the sheer size of the fund, whereas moving the market is less of a concern for the smaller ETF. BOND has $3.5 billion in assets, whereas the Total Return Fund has $223.1 billion in assets. [Bill Gross ETF Not Affected by PIMCO’s Increased Use Of Swaps]

The firm will have to update its prospectus disclosure to reflect the use of derivatives before the ETF can hold them.

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