ETF Investment Solutions Series

Issues | Education | Solutions

May 2012
I
L
B
The PIMCO ETF Investment Solution
Series offers insight into the challenges
investors face and provides an educational
framework for implementing potential
solutions using PIMCOs suite of ETF
investment strategies.
Your Global Investment Authority
PIMCO ETFs
Paul Kim
Vice President
Product Manager
Ronit Walny
Vice President
Product Manager
A Global Approach to
Infation Protection
with PIMCO ETFs
Issue
As inationary pressures increase for U.S. investors, and rates remain low,
does it make sense to expand from U.S. TIPS into global ination-linked
bonds? What are the key considerations before doing so?
n The risk of ination is increasing for U.S investors. Expansionary scal and monetary
policies have boosted the money supply, which can lead to ination. Even with
high unemployment, a mismatch between needed and available skills in the labor
pool can lead to wage pressures, which may spur increasing prices for goods and
services. With elevated debt levels in many developed economies, governments
have an incentive to use ination to lower debt-servicing costs (one example of
nancial repression, a strategy that benets governments and other debtors but
tends to penalize savers). Macroeconomic factors also are raising inationary risks.
Amid years of slower growth following the 2008 nancial crisis, for example, lower
investment in production capacity for commodities such as oil has reduced excess
capacity. Less capacity magnies the effects of changing supply/demand dynamics,
which are inuenced by global growth and geopolitical risk. Increased growth
contribution from many emerging market economies continues to heighten
demand for globally sourced goods and services. With so many risks to higher
ination long-term, it may be important to have a portion of an overall portfolio
dedicated to global ination protection.
n U.S. Treasury Ination-Protected Securities (TIPS) are an important tool for ination
protection. TIPS offer the most direct investment to help hedge a portfolio from
U.S. ination because of their direct linkage to U.S. ination. For that reason
and because they also may provide portfolio diversication, they have become a
mainstream asset class. However, interest rates on TIPS, or more to the point the
real yields (nominal yields with ination expectations removed), have declined
measurably in recent years. Currently TIPS offer negative real yields for maturities
going out past 15 years. This creates a conundrum for investors buying TIPS
with the goal to preserve purchasing power.
n In the current low-yield environment, many investors are seeking additional sources
of ination-linked return potential beyond exposure to TIPS indexes. PIMCO feels
What is an ination-linked bond?
Ination-linked bonds are securities designed to help protect investors from ination.
Primarily issued by sovereign governments, such as the U.S. and the U.K., they are
indexed to ination so that the principal and interest payments rise and fall with the
rate of ination.
2 MAY 2012 | ETF INVESTMENT SOLUTIONS SERIES
this may be accomplished through active management of a TIPS
portfolio, and by looking outside the U.S. to global ination-
linked bonds, which allows for more opportunities for active
management, the potential for higher real rates (Figure 1), and
currency exposure beyond the U.S. dollar.
Figure 1: Real yield curve comparison
Source: Barclays. Data as of 23 April 2012. Countries are represented
by the Barclays Capital Universal Government Ination-Linked
Bond Index.
Australia
-4
-3
-2
-1
0
1
2
3
4
5
6
0 5 10 15 20 25 30 35 40 45
Maturity (years)
R
e
a
l

y
i
e
l
d

(
%
)

Brazil
Italy
Mexico
Chile
France
U.S.
Canada
U.K.
n Looking beyond U.S. TIPS, the most liquid ination-linked bond
market in the world, it is important to understand multiple
dimensions of the global ination-linked bond market global
economic trends, country credit risk, bond characteristics,
Consumer Price Index (CPI) basket construction, and liquidity
in each countrys ination-linked bond markets.
Education
The ination-linked bond market today
n Ination-linked bonds represent a distinct asset class in which
both principal and interest payments are linked to ination as
measured by the ofcial consumer price index of a given country
or region. The principal value of an ination-linked bond is
adjusted for changes in the relevant consumer price index.
A xed rate of interest (real coupon) is paid on the ination-
adjusted principal. This adjustment process can allow ination-
linked bonds to hedge against ination, particularly when held
to maturity. In addition, ination-linked bonds have historically
offered portfolio diversication because they generally react
differently to ination than stocks and bonds. Global ination-
linked bond markets have grown substantially in the past decade
both in terms of market size and the number of issuers. The total
capitalization of these bonds, including both developed and
emerging market sovereign issuers, is approximately $2.5 trillion
(Figure 2). Of this, about $2 trillion is issued by developed
countries and the remaining $500 billion is issued by emerging
market countries.
Figure 2: Growth of universal ination-linked bond market
Source: Barclays and represented by Barclays Capital Universal
Government Bond Index. Data as of 31 March 2012.
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
2,750
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
EM
Developed ex. U.S.
U.S.
n U.S. TIPS represent the largest ination-linked bond market, with
approximately $848 billion of outstanding market value, while
the U.K., Germany, France, Italy, Sweden, Canada and Australia
also actively issue ination-linked bonds (Figures 2 and 3).
n A growing roster of nations now issue ination-linked bonds,
bolstering their position as a mainstream asset class and
creating sufcient liquidity to attract international investors.
Brazil is the largest among the emerging market issuers of
ination-linked bonds, with approximately $278 billion
outstanding (Part of EM in Figure 2). Mexico is the second
with $52 billion. In addition, other countries such as Chile,
South Africa, Israel and Turkey have sizeable and growing
ination-linked bond markets. The number of emerging
market issuers is expected to increase further with several
other countries beginning to issue ination-linked bonds.
Figure 3: Global ination-linked bonds outstanding
Source: Barclays and represented by Barclays Capital Universal
Government Bond Index. Data as of 31 March 2012.
Argentina 0.5%
Brazil 11.1%
Chile 0.6%
Colombia 0.1%
Israel 1.6%
South Korea 0.2%
Mexico 2.1%
Poland 0.3%
South Africa 1.2%
Thailand 0.1%
Turkey 1.8%
Total 19.6%
Emerging
Markets
19.6%
U.S. 33.9%
Greece 0.0%
U.K.
21.6%
France 9.4%
Germany
3.1%
Italy 5.4%
Japan 2.0%
Sweden
1.5%
Australia 1.0%
Canada 2.5%
Investment Products
Not FDIC Insured | May Lose Value | Not Bank Guaranteed
ETF INVESTMENT SOLUTIONS SERIES | MAY 2012 3
n Ination in many countries has historically tended to be positively
correlated and is often inuenced by common factors, including
the constituents of CPI, the impact of global economic and
political events, demographic trends, and global debt dynamics.
For example, a disruption and subsequent rise in oil prices should
have a similar impact on the energy components of various
countries CPI baskets. However, there are relative differences
in index weights. For example, in Figure 4, the primary weights
of food, energy, and housing vary across countries. The change
in such indexes from increases in prices for oil, corn, or wheat is
generally more subdued in developed markets than emerging
markets. Component weights of food and energy have a larger
representation in emerging market baskets, and are passed
through quicker. This makes emerging market CPI more
responsive to commodity price changes. In addition, unique
factors can impact single country or regional ination differently
including sharp currency uctuations, regional political instability,
natural disasters, or swift policy changes such as increases in a
value added tax (VAT). These subtle differences in responsiveness
may permit active managers to structure a portfolio based on
differing ination dynamics.
Figure 4: CPI country construction
Source: Haver Analytics. Data as of as of 31 March 2012.
Housing (ex Energy)
Energy
Food and Beverages
0%
10%
20%
30%
40%
50%
60%
Brazil Canada Chile Germany UK US
A PIMCO Solution
PIMCO Global Advantage Ination-Linked Bond Strategy
Fund (Ticker: ILB)
n The PIMCO Global Advantage Ination-Linked Bond Strategy
Fund is designed to be an innovative approach to investing in
global ination-linked bonds. It is benchmarked to both a
GDP-weighted index that spans developed and emerging
markets and a market-weighted index. The approach is designed
to help investors capitalize on the real return opportunities
created by secular shifts taking place in the global economy.
n While the funds primary benchmark is the Barclays Universal
Government Ination-Linked Bond Index, we believe the funds
secondary benchmark, the PIMCO Global Advantage

Ination-
Linked Bond Index (GLADI

ILB), more accurately reects the

funds investment strategy. GLADI ILB uses a GDP-based
country weighting to align investors ination-linked bond
exposures with issuers capacity to meet their debt obligations.
This weighting approach tilts investors exposures to those
countries that are the leading contributors to global growth,
which should provide a more responsive and comprehensive
ination hedging solution than traditional global ination-
linked bond indexes. Traditional market-cap approaches are
based on the arbitrary weighting of issuance patterns for
ination-linked bonds around the world.
n Other core features distinguish the Global Advantage Ination-
Linked Bond Index from more traditional methods. The index
is designed to:
Provide a continuum in coverage from developed to
emerging markets that captures the fuller set of global
investment-grade opportunities and avoids a bias in
weighting toward developed markets.
Evolve with the worlds economic structure, providing broad
exposure to a diversied basket of global currencies.
Screen for credit and investability, limiting bond inclusion to
issuing countries with investment grade credit ratings, and a
minimum liquidity threshold at the country and bond level.
n ILB is actively managed, using PIMCOs combination of top-down
macro forecasts and bottom-up country analysis, as well as a
depth of global resources to help navigate the ination markets
of countries around the world. We believe PIMCOs disciplined
top-down cyclical and secular investment process is ideally suited
for asset allocation and global macro forecasts, while our global
presence and specialty desks in global ination-linked bonds
and emerging markets focus on providing the Global
Advantage Ination-Linked Bond Strategy with best trade ideas
through bottom-up ination and security analysis. In our efforts
to achieve value-added results, we actively apply the following
strategies in ILB:
Duration management
Yield curve positioning
Ination specic strategies
Country rotation
Security selection
For more information, please contact your advisor, call 1-888-400-4ETF
(1-888-400-4383) or visit www.pimcoetfs.com
Investors should consider the investment objectives, risks, charges and expenses of the funds
carefully before investing. This and other information are contained in the funds prospectus, which
may be obtained by contacting your PIMCO representative. Please read the prospectus carefully
before you invest.
Effective April 4, 2012, PIMCO changed the ticker for the Total Return ETF from TRXT to BOND. No action is required for
current investors in the Fund. While BOND is managed utilizing PIMCOs Total Return strategy, it does not use options,
futures or swaps.
Exchange Traded Funds (ETF) are afforded certain exemptions from the Investment Company Act. The exemptions allow,
among other things, for individual shares to trade on the secondary market. Individual shares cannot be directly purchased
from or redeemed by the fund. Purchases and redemptions directly with ETFs are only accomplished through creation unit
aggregations or baskets of shares. Investment policies, management fees and other information can be found in the
individual ETFs prospectus.
A word about risk: Past performance is not a guarantee or reliable indicator of future results. Investing in the bond market
is subject to certain risks including the risk that xed income securities will decline in value because of changes in interest
rates; the risk that fund shares could trade at prices other than the net asset value; and the risk that the managers
investment decisions might not produce the desired results. Investing in foreign denominated and/or domiciled securities
may involve heightened risk due to currency uctuations, and economic and political risks, which may be enhanced in
emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early
repayment risk, and their value may uctuate in response to the markets 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. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that
invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. 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. Diversication
does not ensure against loss.
The value of most bond funds and xed income securities are impacted by changes in interest rates. Bonds and bond funds
with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally
fall as interest rates rise. Duration is the measure of a bonds price sensitivity to interest rates and is expressed in years.
Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index
covers the U.S. investment grade xed rate bond market, with index components for government and corporate securities,
mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specic indices
that are calculated and reported on a regular basis. The Dow Jones U.S. Index is a capitalization-weighted index designed
to represent 95% Of the U.S. market. Component companies are adjusted for available oat and must meet objective
criteria for inclusion in the index. Reconstitution is quarterly. 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 contains the current opinions of the manager and such opinions are subject to change without notice. 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. Statements concerning nancial market trends
are based on current market conditions, which will uctuate. 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. 2012, PIMCO.
PIMCO advised funds are distributed by PIMCO Investments LLC.
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n ILB benets from PIMCOs breadth of investment experience. Having an experienced active
manager is essential to navigating the global markets, particularly where deep expertise
in both developed and emerging markets is important. PIMCO was an early leader in
analyzing ination-linked bonds, having worked with the U.S. Treasury Department in 1997
to advise on the launch of the TIPS program. PIMCOs ination-linked bond management
experience has since extended to global ination-linked bonds including developed and
emerging markets. PIMCO manages over $100 billion in dedicated global ination-linked
bond portfolios and over $75 billion in dedicated emerging market portfolios. We feel our
size and breadth place us in the forefront of information ows, supplementing a robust
practice with a timely understanding of the market dynamics so crucial to investing in
these markets.
n Recognizing that ination is a risk, ILB offers the opportunity to expand globally with
an experienced manager to seek enhanced ination-linked bond return potential.