Tag Archives: PIMCO 1-5 Year U.S. TIPS Index Fund

Cautious Forecast for Next 6 Months

Pardon the obvious, Wall Street is a pretty bullish place. So, it’s refreshing to hear someone down there actually say things don’t look so good.

Ed Keon is one of the few.

“There remains a high level of caution and pessimism in the country among the average consumer and business executive,” said Keon, managing director and portfolio manager for Quantitative Management Associates. He spoke Tuesday at Prudential’s 2010 Midyear Market Outlook panel, the one with the tantalizing title: “Will the economy double-dip?” He added, “There’s plenty of money to invest, but people are reluctant to do so.”

He says the stock pullback is a symbol of not just the economic activity, but also a malaise among the American people. But he believes stocks represent a good value, compared to the long-term bond. The dividend yield for the S&P 500 Index is 2%. Considering that a quarter of the index doesn’t pay dividends, many of the stocks in the index are paying 3% to 6%, compared to the 10-year bond’s yield of 2.9%. When you can get a better return from risky large-cap stocks than Treasury’s you know stocks are cheap. Remember, prices move inversely to yield. So as prices move lower, yields rise.

For a full explanation of the relationship of yields to prices and dividends, check out Dividends Stocks for Dummies.

Not only are stocks cheap, but earnings are strong and will come in above expectations, said Keon. Still he cautions again the expectation that stocks will see a sudden resurgence of confidence. Until we address the structural problems in the economy, Keon said we won’t be able to get moving until we deal with the giant levels of debt. He says he’s currently holding allocations near benchmark weights, but is underweight TIPS bonds.

Top ETFs holding TIPS in alphabetical order:

  • Barclays Capital TIPS Bond Fund (TIPS)
  • PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ)
  • SPDR Barclays Capital TIPS ETF (IPE)
  • SPDR DB International Government Inflation-Protected Bond ETF (WIP)

Getting Some TIPS from PIMCO

Pimco, the world’s largest bond fund manager by assets, launched its second ETF, the PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ). The ETF began trading Monday on the NYSE Arca. It tracks the Merrill Lynch 1-5 Year U.S. Inflation-Linked Treasury Index. This unmanaged index holds TIPS (Treasury Inflation Protected Securities) with a maturity between one and five years, and averaging about three years. The fund charges in expense ratio of 0.20%.

STPZ is the first of three ETFs on TIPS, U.S. Government-issued fixed-income securities that give investors explicit inflation protection and the potential for additional yield. The principal value of TIPS is adjusted monthly according to the rate of inflation measured by the U.S. consumer price index.

Pimco said in a written statement that the new fund is the “first ETF to focus specifically on the short maturity segment of the TIPS market and aims to offer investors a high degree of protection against the immediate effects of inflation on their portfolio. Shorter-dated TIPS have historically shown a significantly higher correlation with current inflation and lower volatility relative to an index that covers the entire TIPS maturity spectrum.”

Currently, inflation remains close to non-existent, with deflation a bigger threat to the economy. But, that situation just can’t last. The government’s spending surge from the unprecedented fiscal stimulus bill passed earlier this year has the potential to significantly boost prices across the economy.

Pimco has been one of the most active participants in the TIPS market since the product’s inception in 1997. Next month, the bond fund firm expects to launch two more TIPS ETFs. The PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ) will address the long end of the market while the PIMCO Broad U.S. TIPS Index Fund (TIPZ) will give TIPS exposure across the maturity spectrum. These two will take on the two TIPS ETFs already on the market, the iShares Barclays TIPS Bond Fund (TIP) and the SPDR Barclays Capital TIPS ETF (IPE).

“By focusing on the short end of the maturity curve, we’re addressing the two main concerns we’ve heard from investors (inflation protection and protection against the risk of rising interest rates),” John Cavalieri, a Pimco senior vice president and real return product manager, told IndexUniverse. He said while the ETFs on the market provide inflation protection, STPZ is uniquely positioned to protect against the risk of rising interest rates. “It boils down to this ETF providing exposure to the short end of the maturity curve, which limits interest rate sensitivity.”

Pimco launched its first ETF in June.