ETF Trends
ETF Trends

The PIMCO Total Return ETF (NYSEArca: BOND), the ETF version of the storied Total Return mutual fund, is snatching up investment-grade corporate bonds at a rapid clip as some investors and market observers fret about the Federal Reserve raising interest rates in 2015.

BOND, often referred to as the “Bill Gross ETF,” has quadrupled its allocation to high-grade corporate bonds since January, reports Lisa Abramowicz for Bloomberg.

At the end of July, BOND had a 38% weight to corporate bonds, which represented 28% of the ETF’s duration, according to PIMCO data. Duration is the measure of a bond’s sensitivity to interest rate changes.

BOND’s increased exposure to corporates has come at the expense of Treasuries. PIMCO has cut its allocation to U.S. government related debt in its Total Return Fund (PTTRX) to 45% in July, compared to 47% in June and 50% in May, reports Susanne Walker for Bloomberg.

BOND’s exposure to U.S. Treasuries is significantly lower at 16%. Gross, though, has been betting on short-term Treasuries, which have underperformed long-term debt this year. PTTRX shows a 6.21 year effective duration while BOND has a duration of 5.34 years. [PIMCO’s BOND Pares Treasury Weight]

Although high-yield corporate bond ETFs were recently decked by outflows by retail investors, investment-grade corporate bond funds have remained popular. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has added $1.34 billion in new assets this year.

Debate remains regarding exactly when the Fed will raise interest rates as slack household spending and stagnant wage growth could put rate hikes on the back burner for the foreseeable future. However, even if rates do rise next year, BOND’s ability to pare Treasury exposure and its heavy tilt toward investment-grade company debt could help the ETF remain durable because funds with lower durations and robust high-grade corporate exposure can outpace broader fixed income indices in a rising interest rate environment when the economy is expanding. [Advantages of Corporate Bond ETFs]

With nearly $3.6 billion in assets under management, BOND is the second-largest actively managed ETF behind the PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT).

PIMCO Total Return ETF

Tom Lydon’s clients own shares of LQD.