As with previous Pimco-Source collaborations, the ETF will be physically invested and is a smart-passive design.
The Pimco Short-Term High Yield Corporate Bond Index Source ETF will aim to take advantage of the lower volatility and higher returns seen in the short-term high yield market, compared to the S&P 500 and the broader high yield market, according to Pimco’s back-testing.
The ETF will be managed using Pimco’s three-pronged smart passive methodology, using "smart index construction, smart optimisation and smart execution".
Within this methodology Pimco uses its own internal credit screening process, to assign a traffic light designation of red, yellow or green to each high-yield issuer, independent of any ratings from outside credit agencies.
Any issuers assigned a red light credit are excluded from the portfolio, regardless of their relative value and no bond can be purchased prior to research from Pimco’s 40-strong team of credit analysts.
The firm said that while short-term high yield bonds do share some behavioural characteristics with stocks, overall returns tend to be less volatile because the income component of the total return (the coupon or yield) has historically been higher than the income (or dividends) from stocks.
Short-term high yield bonds are also thought to have less of a correlation to equities than the broader high yield market and so the ETF is designed to work better as a portfolio diversifier.
Pimco said the track record of the short-term segment of the high yield market, from September 1988 to May 2011, showed it had achieved over 98% of the returns of the S&P 500 with only 51% of its volatility, as measured by the Barclays Capital US High Yield 1-5 Year Index.
Since the end of 2008, the BofAML 0-5 Year US High Yield Constrained Index shows short-term high yield bonds have provided 133% of the performance of equities at just 44% of the volatility.
Source was unable to give an exact launch date for the Pimco Short-Term High Yield Corporate Bond Index Source ETF, but it is understood by Portfolio Adviser to be reliant on gaining enough interest from the buyers’ market.