21 November 2009
By Joseph Lisanti
Both buy-and-hold investors and active traders like exchange-traded funds for their low cost and ease of purchase.
But the latest ETF from Pimco, one of the world’s largest bond managers, is not the kind of investment you should buy and lock away for your retirement.
In fact, unless you’re a skilled and nimble trader, experts say you shouldn’t touch the Pimco 25 Year Zero Coupon Treasury Fund.
The new fund holds the principal portion of U.S. Treasury zero-coupon bonds that mature up to 30 years from now.
Both the far-off maturity and lack of periodic interest payments make these securities extremely sensitive to interest rate movements. When rates fall, their value soars. But with rates now historically low, “there’s only one way for interest rates to go, and that is up,” said Ray Mignone, a certified financial planner in Little Neck, Queens. “The zero-coupon bond will really get clobbered,” he added.
Long before ETFs were offered and became popular because of their trading ease, the zero-coupon bond was a great choice for a long-term investment.
Mignone remembers that, back in 1980 when interest rates were high, so-called zeros had effective returns of 15% or more a year. But times have decidedly changed.
The new Pimco ETF will probably find a customer base among professionals refining their trading strategies.
But that hasn’t happened yet: In its first week on the market, only 8,000 shares were traded.