ETF Talk: Profiting from PIMCO

Treasury bonds, traditionally viewed as a safe haven for investors, have become what I think may be the last, big bubble in the market. With the Obama administration offering nearly $2 trillion in Treasury bonds this year alone, combined with unprecedented market volatility, the ups and downs in the normally stable Treasury market have reflected understandable investor uncertainty. However, investors looking to play the Treasury market now have an important tool on their side: the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ), which invests in short-term, low-yield Treasury bonds.

Shrewd investors fled to the safety of the Treasury market in 2008 as the equities incurred their biggest decline in 80 years. The need for the deficit-running U.S. government to issue Treasury bonds looms large for at least the next couple of years. The federal government’s expansive borrowing is destined to grow further as President Obama’s economic stimulus package is estimated to cost more than $2 trillion in 2009 alone.

The surging Treasury debt could fuel inflation as the U.S. government boosts the money supply by printing additional dollars. The current low bond yields do not offer investors any protection from inflation. Even if the economy begins to recover by late 2009, watch for interest rates to climb and the price of Treasury bonds to drop.

This has created an opportunity for Pacific Investment Management Company (PIMCO), a blue-chip bond giant with nearly $800 billion under management. During the last couple of decades, the firm has become a household name in fixed-income investing. The new PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ) is an exchange-traded fund (ETF) that bears watching.

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This ETF will compete directly with iShares Barclays 1-3 Year Treasury Bond (SHY), a well-established bond ETF. As can be seen from the chart, PIMCO’s TUZ has been outperforming SHY since the former’s inception on June 2 this year.

PIMCO is a well-known name in fixed-income investing but you may want to hold off on buying Treasuries until the market stabilizes and the trading volume of TUZ rises. There is nothing wrong with keeping a high-cash position as the ramifications of the U.S. government’s borrowing unfold in the months to come.

If you’d like to learn more about the Treasury market or if you have any questions about ETFs that you’d like me to answer in an upcoming ETF Talk feature, please click here.