In the wake of the highly successful introduction of PIMCO Total Return ETF (NYSEArca: BOND), PIMCO is launching a new actively managed bond exchange traded fund that seeks to provide above-inflation returns on global bonds on May 1. This is great as more advisors are searching for yield and diversification. [Performance Scorecard: Bill Gross’s PIMCO Total Return ETF]

The PIMCO Global Advantage Inflation-Linked Bond Strategy Fund (NYSEArca: ILB) will seek to provide above-inflation returns by actively managing global inflation-linked bonds and currencies. It will compete with SPDR DB International Government Inflation-Protected Bond ETF (NYSEArca: WIP), which follows an index and is not actively managed.

I spoke with Mihir Worah, Managing Director and Head of PIMCO’s Real Return portfolio management team, who heads up the inflation hedging business side at PIMCO. He will oversee the fund’s daily operations and guide the overall portfolio toward countries experiencing stronger growth, instead of relying on a market-cap weighted index, which may heavily favor the most indebted issuer, or in the case of inflation-linked bonds, country specific inflation-linked bond issuance.

Inflation-indexed bonds, real return securities or inflation-linked bonds are bond securities with their principal indexed to the current inflation level. Consequently, these securities are intended to take out inflation risk and provide long-term returns above the current rate of inflation.

The new active fund will maintain about two-thirds of its inflation-linked bond holdings from developed countries and one-third of its holdings from the emerging markets. It should be noted that the fund will be exposed to foreign currency risks to maintain its high yield exposure.

Developed country bonds currently sit in low inflation but also provide limited yields. The U.S. inflation rate was 2.7% in March but yield on bonds are close to zero percent. In contrast, the quick growth in the emerging markets has spurred inflationary pressures to about 3% to 5%; however, rates of return remain much more attractive. For instance, Worah pointed out that Brazilian inflation-linked bonds show yields of 5% on top of inflation and Mexico’s inflation-linked bonds have yields of 3% on top of inflation.

Considering the current inflation levels, Worah believes that the fund will provide investors with a moderately priced entry point into this market.

“Over the last 20 years, U.S. has experienced a two to two-and-half percent inflation rate,” Worah said. “We see three to three-and-half percent somewhat higher later. For the emerging markets, we also expect inflation to somewhat increase, as well.”