PIMCO Exchange-Traded Funds Well-Engineered Solutions PIMCO exchange-traded funds are designed to meet a broad range of investor needs, and provide access to our timetested investment process and world-class portfolio management expertise in a transparent, tradable and accessible ETF vehicle.
An introduction to exchange-traded funds Exchange-traded funds, or ETFs, are investment vehicles that share many attributes with mutual funds. They also offer benefits such as intraday pricing, trading flexibility and transparency of holdings. WHAT ARE ETFs? Like mutual funds, ETFs are open-ended investment companies registered under the Investment Company Act of 1940 and subject to many of the same rules and regulations. Both ETF and mutual fund investors own a proportional share of the pooled underlying securities and both vehicles offer passive (index) and active strategies. However, ETFs offer a number of distinct benefits that have made them increasingly popular investment choices. Transparency Most ETF holdings are disclosed on a daily basis, allowing investors to understand the makeup of their portfolios. This may be particularly beneficial during periods of market dislocations. Liquidity ETFs draw on two sources of liquidity: liquidity in the secondary market where ETF shares are traded throughout the day, and the underlying liquidity of the securities that constitute the ETF portfolio, which can be accessed through new share issuance. Trading flexibility Unlike mutual funds, which can be bought or sold at end-of-day prices only, ETFs trade on an exchange throughout the day at current market prices. They may also be traded on margin, sold short, or traded using limit or stop-loss orders, providing additional flexibility. ETFs may trade at a premium or discount to net asset value (NAV), and transactions may be accompanied by a bid-offer spread and brokerage commissions. Tax mechanics ETFs that use in-kind redemptions may be able to reduce capital gains realized within the fund and offer more equitable capital gain distributions to shareholders. Specific market exposures ETFs provide a convenient way for investors to gain exposure to a specific asset class or market sector. 02 WELL-ENGINEERED SOLUTIONS
PIMCO ETFs Understanding the mechanics of ETFs ETFs are traded throughout the day on major stock exchanges at current market prices. To help ensure liquidity in these secondary markets, the number of outstanding ETF shares can be increased or decreased by authorized participants, in a creation or redemption transaction. HOW ETF SHARES WORK PRIMARY MARKET SECONDARY MARKET ETF investors ETF sponsor (e.g., PIMCO) AP creates new ETF shares/redeems existing ETF shares Authorized participant (AP) AP buys/sells ETF shares Investor buys/sells ETF shares on stock exchange (e.g., NYSE, NASDAQ) via broker-dealers ETF investors Authorized participants (APs) are selfclearing broker-dealers who have signed an agreement with the ETF manager. Shares are created when an AP delivers a basket of securities to the ETF manager for an appropriate number of shares; these are then sold to investors via a secondary market such as the New York Stock Exchange or NASDAQ. Conversely, ETF shares are redeemed when an AP delivers them back to the ETF manager in exchange for securities. As a major investor in many segments of the fixed income markets, PIMCO looks to provide additional value to this process by using our trading expertise to obtain attractive pricing for securities. In such cases, we will accept cash from an AP and invest directly in these markets. ADDITIONAL ETF FACTS Unlike individual equity securities, ETFs can create and redeem new shares every day, if needed. The ability to match the flow of shares with investor demand helps maintain liquidity and accurate pricing in the secondary markets. Investors may transact at current market prices, while creation and redemption transactions occur at the closing NAV of the fund and can only be implemented by APs in block unit sizes, typically 50,000 to 100,000 shares. 02
PIMCO s active and smart index ETFs provide investors with direct access to the capital markets and our active management expertise. Doug Hodge PIMCO CEO PIMCO ETFs Well-engineered solutions for a broad range of investment needs PIMCO fixed income ETFs offer access to PIMCO s time-tested, forward-looking investment process, innovative strategies and more than four decades of portfolio management expertise all with the transparency, tradability and accessibility that the ETF vehicle provides. PIMCO s ETF suite is designed to provide effective tools for investors to make strategic and tactical fixed income allocations, including: Innovative, value-added approaches to ETF portfolio management through our actively managed and smart index strategies Access to our portfolio management expertise, including trade execution and risk management capabilities Exposure to a variety of sectors, geographic regions and investment objectives Versatile roles in a portfolio PIMCO ETFs can be used in many ways to build and manage portfolios, with applications that are designed to help investors meet both long- and shortterm goals. Long-term positioning (strategic) Asset allocation Specific market exposure for constructing portfolios Portfolio completion Add missing asset classes to allocation strategy Cash management Convenient, transparent vehicle for those looking to tier cash needs Risk management Convenient implementation of risk management strategies Expression of market views (tactical) Directional/yield curve views Position for interest rate trends, using long and short trades to implement market or yield curve views Interim exposure Maintain market exposure while searching for specific market opportunity Portfolio rebalancing Look to correct portfolio drift by easily shifting over- and underweight exposures 03 WELL-ENGINEERED SOLUTIONS
PIMCO ETFs PIMCO s innovative approach to ETFs PIMCO ETFs provide investors with a broad array of fixed income choices across sectors, geographic regions and investment objectives. Long an innovator in portfolio management, PIMCO takes a unique approach to managing ETFs to help investors meet their financial needs. Actively managed ETFs PIMCO is a pioneer in actively managed ETFs, which offer direct access to our rigorous investment process and specialized resources in every major global bond sector, credit research, security selection and risk management. These funds are managed by the same portfolio management teams and traders who manage PIMCO strategies across multiple vehicles, including institutional separate accounts, mutual funds and other structures. Smart index ETFs PIMCO s active management expertise strongly influences how we manage our fixed income index ETFs. Our approach includes smart: --Index selection and design We choose indexes that we determine are structurally sound and specific, stable, suitable and scalable. --Portfolio replication Rather than simply replicate the securities in a particular index, we match key economic risk factors and focus on liquidity, market access and minimization of transaction costs. --Portfolio execution and rebalancing Disciplined trading and multiple trading relationships are crucial for best execution and minimizing transaction costs. THE CHALLENGE OF REPLICATING FIXED INCOME INDEXES Many ETFs seek exposure to a specific market segment by replicating the underlying basket of securities in a particular index. While broad stock indexes generally reflect a manageable number of easily traded securities, bond indexes can contain thousands of securities, which may be in less liquid sectors that are difficult to price. As a result, bond index ETFs typically attempt to track a benchmark by sampling a much smaller number of investments. PIMCO s smart index strategies built on more than four decades of fixed income portfolio management and trading expertise takes the index approach one step further. Our index portfolios are structured to optimize market exposure by accounting for a wide number of variables, including risk factors, liquidity and transaction costs. Index Index type Number of securities in index Barclays U.S. Aggregate Index Broad bond 9,611 25% to 71% Dow Jones U.S. Index Broad equity 1,282 100% S&P 500 Index Broad equity 505 100% Russell 3000 Index Broad equity 2,986 100% Source: PIMCO, based on publicly available data as of 30 September 2015. Percent of index securities in ETFs of leading providers The methodology for compiling the data shown in the chart was to record the actual issues held by four leading index benchmarks, both broad bond and equity, and compare these to at least three leading ETF providers' (by overall ETF assets under management) funds that utilize the indexes as benchmarks. The range of the percentage of index securities held, tracking error and Active Share held by these ETFs as of the date provided is presented. All information for calculating the figures shown was obtained from publicly available information found on the ETF providers' websites. 04
HOW WE THINK PIMCO s time-tested investment process PIMCO s investment process is key to how we manage our ETF portfolios. We aim to add value for clients by marrying our top-down global outlook with bottom-up credit research and risk management, supported by the deep experience of our investment professionals. The economic forums Starting at the top We believe an informed macroeconomic outlook both over long-term (secular) and short-term (cyclical) horizons is critical in identifying opportunities and risks well before they occur. Four times a year, our investment professionals from around the world gather to discuss and debate the state of the global markets and economy, pinpoint developments we believe will have important investment implications going forward and implement long-term strategies. The investment committee Setting the parameters Based on the conclusions drawn at the forums, our Investment Committee (IC) develops parameters that underpin the strategies for all portfolios. Within this group of the firm s most senior investment professionals, PIMCO s insights and thought leadership are distilled into specific investment guidelines. These macro guardrails represent where we stand on such factors as growth, inflation, duration, volatility, sectors, countries and currencies. Portfolio management From the bottom up Within this top-down framework, our regional and specialist portfolio managers actively manage our clients investments, using rigorous analysis and research to inform bottom-up security selection. In doing so, they draw on PIMCO s extensive global resources: proprietary risk management technology, a highly skilled trading desk and the expertise of more than 700 investment professionals around the world, with backgrounds from finance to government to physics. ADDING VALUE FROM TOP TO BOTTOM ECONOMIC FORUMS PIMCO PORTFOLIOS INVESTMENT COMMITTEE Four times a year, our investment professionals around the world gather to identify the trends that will drive the global economy and markets. This macroeconomic outlook informs all PIMCO portfolios. The Investment Committee (IC) meets two hours each day to distill our outlook and current events into specific investment themes and risk factor targets. Portfolio managers are responsible for day-today strategy execution, leveraging our scores of sector and regional specialists. PORTFOLIO MANAGERS 05 WELL-ENGINEERED SOLUTIONS
For more information about PIMCO s ETF offerings, as well as market insights and investor education, please visit pimcoetfs.com, or call 888.400.4ETF (4383).
Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information is contained in each fund s prospectus, which may be obtained by contacting your PIMCO representative. Please read the prospectus carefully before you invest. Past performance is not a guarantee or reliable indicator of future use. A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. Certain U.S. Government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions. Due to the costs inherent in buying or selling fund shares, frequent trading may detract significantly from investment returns. Investment in fund shares may not be advisable for investors who expect to engage in frequent trading. ETFs are subject to secondary market trading risks. Shares of an ETF will be listed for trading on an exchange, however, there can be no guarantee that an active trading market for such shares will develop or continue. There can be no guarantee that an ETF s exchange listing or ability to trade its shares will continue or remain unchanged. Shares of an ETF may trade on an exchange at prices at, above or below their most recent NAV. The per share NAV of an ETF is calculated at the end of each business day and fluctuates with changes in the market value of the fund s holdings. The trading prices of an ETF s shares fluctuate continuously throughout the trading day based on market supply and demand, which may not correlate to NAV. The trading prices of an ETF s shares may differ significantly from NAV during periods of market volatility, which may, among other factors, lead to the fund s shares trading at a premium or discount to NAV. Premiums (when market price is above NAV) or discounts (when market price is below NAV) reflect the differences (expressed as a percentage) between the NAV and the market price of the fund on a given day, generally at the time the NAV is calculated. A discount or premium could be significant. Data in chart format displaying the frequency distribution of discounts and premiums of the Market Price against the NAV can be found for each fund at pimcoetfs.com. Barclays U.S. Aggregate Index represents securities that are SEC registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Dow Jones U.S. Market Index is a market-capitalizationweighted index, providing broad-based coverage of the U.S. stock market. The Russell 3000 Index is an unmanaged index generally representative of the U.S. market for large domestic stocks as determined by total market capitalization, which represents approximately 98% of the investable U.S. equity market. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. 2016 PIMCO PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY 10019 is a company of PIMCO. About PIMCO PIMCO is a leading global investment management firm, with offices in 12 countries throughout the Americas, Europe and Asia. Founded in 1971, PIMCO offers a wide range of innovative strategies to help millions of investors worldwide meet their needs. Our goal is to provide attractive returns while maintaining a strong culture of risk management and long-term discipline. pimcoetfs.com PBETF_43061 CMR2016-0226-168563