ETF Building Blocks for a Core Bond Portfolio

Still reverberating in the fixed income world is last Friday’s news that Bill Gross has departed PIMCO, the bond house he founded, for Janus Capital (NYSE: JNS). Not surprisingly, the news of Gross’ acrimonious departure from the company he built has stoked talk of redemptions at PIMCO.

The PIMCO Total Return ETF (NYSEArca: BOND), the actively managed ETF formerly managed by Gross, has lost almost $545 million in the two trading days since he resigned from PIMCO. BOND, the second-largest U.S. actively managed ETF behind its family member, the PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT), lost $446.5 million on Friday Sept. 26, a one-day record, Lisa Abramowicz and Jody Shenn for Bloomberg. Those outflows dipped to $98 million, but investors looking for other fixed income pastures have plenty of exchange traded funds to choose from. [PIMCO Bond ETF Loses $545M After Gross Leaves]

The ETF had $3.11 billion in assets under management as of the close of markets Sept. 29, according to PIMCO. BOND is now being managed by Scott Mather, Mark Kiesel and Mihir Worah. BOND’s major allocations are as follows: 36% to U.S. corporates, 23% to ex-U.S. developed market sovereigns, 27% to mortgage-backed securities and 17% to U.S. government debt.

Investors looking for alternatives can gain access to U.S. government bonds via the iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI).

For the government portion and to gain intermediate exposure, we like IEI. The ETF benefits from the strong credit quality one would expect with Treasuries, has a modest 0.15% expense ratio and trades with a tight $0.02 bid/ask spread. The 30-day SEC yield is 1.4%,” said S&P Capital IQ in a note out Tuesday.

The research firm, which rates IEI overweight, notes the ETF’s duration of 4.5 years is lower than the PIMCO Total Return mutual fund, which was also previously managed by Gross. BOND and IEI have comparable durations. [Treasury Demand Lifts Bond ETFs]

S&P Capital IQ recommends the overweight-rated Vanguard Mortgage-Backed Securities Index ETF (NYSEArca: VMBS) for investors looking to gain exposure to mortgage-backed securities. The ETF tracks U.S. agency mortgage-backed bonds, including Fannie Mae, Freddie Mac, and Ginnie Mae securities. VMBS charges just 0.12% per year. VMBS has a duration of 4.4 years and the 30-day SEC yield is also 1.4%.

S&P Capital IQ highlighted the Vanguard Total International Bond ETF (NYSEArca: BNDX) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) as options for international bond exposure.