485BPOS
|
PIMCO
ETFs |
Prospectus |
October 30, 2020
|
|
Index
Exchange-Traded Funds |
|
|
|
|
TICKER |
EXCHANGE |
TREASURY |
|
|
PIMCO
25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund |
ZROZ |
NYSE
Arca |
TREASURY
INFLATION PROTECTED SECURITIES (TIPS) |
|
|
PIMCO
1-5 Year U.S. TIPS Index Exchange-Traded Fund |
STPZ |
NYSE
Arca |
PIMCO
15+ Year U.S. TIPS Index Exchange-Traded Fund |
LTPZ |
NYSE
Arca |
PIMCO
Broad U.S. TIPS Index Exchange-Traded Fund |
TIPZ |
NYSE
Arca |
CORPORATE |
|
|
PIMCO
0-5 Year High Yield Corporate Bond Index Exchange-Traded
Fund |
HYS |
NYSE
Arca |
PIMCO
Investment Grade Corporate Bond Index Exchange-Traded Fund |
CORP |
NYSE
Arca |
Neither the
U.S. Securities and Exchange Commission nor the U.S. Commodity Futures Trading
Commission has approved or
disapproved these securities, or determined if this prospectus is truthful or
complete. Any representation to the
contrary is a criminal offense.
Beginning
on January 1, 2021, as permitted by regulations adopted by the Securities and
Exchange Commission, paper copies of
the Fund’s annual and semi-annual shareholder reports will no longer be sent by
mail from the financial intermediary,
such as a broker-dealer or bank, which offers the Fund unless you specifically
request paper copies of the reports
from the financial intermediary. Instead, the shareholder reports will be made
available on a website, and the financial
intermediary will notify you by mail each time a report is posted and provide
you with a website link to access the report.
Instructions for requesting paper copies will be provided by your financial
intermediary.
If you
already elected to receive shareholder reports electronically, you will not be
affected by this change and you need not take
any action. You may elect to receive shareholder reports and other
communications from the financial intermediary
electronically by following the instructions provided by the financial
intermediary.
You may
elect to receive all future reports in paper free of charge from the financial
intermediary. You should contact the financial
intermediary if you wish to continue receiving paper copies of your shareholder
reports. Your election to receive reports in
paper will apply to all funds held in your account at the financial
intermediary.
.
PIMCO
25+ Year Zero Coupon U.S. Treasury
Index Exchange-Traded Fund
Investment
Objective
The Fund
seeks to provide total return that closely corresponds, before fees and
expenses, to the total return of ICE BofA Long US Treasury Principal
STRIPS
Index.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund.
You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are
not reflected in the tables and examples below.
Shareholder
Fees (fees paid directly from your investment):
N/A
Annual
Fund
Operating Expenses (expenses that you pay each year
as a percentage of the value of your investment):
|
|
Management
Fees |
0.15% |
Total
Annual Fund Operating Expenses |
0.15% |
Example.
The
Example is intended to help you compare the cost of investing
in the Fund with the costs of investing in other exchange-traded funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated, and then sell all of your shares at the end of those
periods.
The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses remain the same. Investors
may pay brokerage commissions on their purchases and sales of Fund
shares, which are not reflected in the Example. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$15 |
$48 |
$85 |
$192 |
Portfolio
Turnover
The
Fund pays transaction costs when it buys and sells securities (or “turns
over”
its portfolio). A higher portfolio turnover rate may indicate higher
transaction
costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in the Annual
Fund
Operating Expenses or in the Example tables, affect the Fund’s performance.
During the most recent fiscal year, the Fund’s portfolio turnover
rate was 14%
of the average value of its portfolio.
Principal
Investment Strategies
The
Fund seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its total assets (exclusive of collateral
held
from securities lending) in the component securities (“Component Securities”)
of ICE
BofA Long US Treasury Principal STRIPS Index (the “Underlying
Index”). The Fund may invest the remainder of its assets in Fixed
Income Instruments that are not Component Securities, but which Pacific
Investment Management Company LLC (“PIMCO”) believes will help
the Fund track its Underlying Index, as well as in cash and investment
grade,
liquid short-term instruments, forwards or derivatives, such as options,
futures contracts or swap agreements, and shares of affiliated bond
funds. “Fixed Income Instruments” include bonds, debt securities and
other
similar instruments issued by various U.S. and non-U.S. public- or
private-sector entities. The average portfolio
duration of this Fund will closely
correspond to the portfolio duration of the securities comprising its
Underlying
Index, as calculated by PIMCO, which as of September
30, 2020 was 29.00 years.
Duration is a measure used to determine the sensitivity of a
security’s price to changes in interest rates. The longer a security’s
duration,
the more sensitive it will be to changes in interest
rates.
The
Underlying Index is an unmanaged index comprised of long maturity Separate
Trading of Registered Interest and Principal of Securities (“STRIPS”)
representing the final principal payment of U.S. Treasury bonds. The
principal STRIPS comprising the Underlying Index must have 25 years or
more remaining term to final maturity and must be stripped from U.S.
Treasury
bonds having at least $1 billion in outstanding face value. As of September
30, 2020 there were 20
issues in the Underlying Index. Index constituents
are capitalization-weighted based on the security prices times an
assumed face value of $1 billion per constituent security. The Underlying
Index
is rebalanced quarterly on March 31, June 30, September 30 and December
31, based on information available up to and including the third business
day before the last business day of the rebalancing month. Securities
that no longer meet the qualifying criteria during the course of the
quarter remain in the Underlying Index until the next quarterly rebalancing
date at which point they are dropped from the Underlying Index.
It is not possible to invest directly in the Underlying Index. The Underlying
Index does not reflect deductions for fees, expenses or
taxes.
PIMCO
uses an indexing approach in managing the Fund’s investments. The
Fund employs a representative sampling strategy in seeking to achieve
its
investment objective. In using this strategy, PIMCO seeks to invest in a
combination
of Component Securities and other instruments, or in Component
Securities but in different proportions as compared to the weighting
of the Underlying Index, such that the portfolio effectively provides
exposure to the Underlying Index. In using a representative sampling
strategy, the Fund may not track its Underlying Index with the same
degree of accuracy as a fund that replicates the composition and weighting
of the Underlying Index. Unlike many investment companies, the Fund
does not attempt to outperform the index the Fund tracks. An indexing
approach may eliminate the chance that the Fund will substantially
outperform its Underlying Index but also may reduce some of the
risks of active management. Indexing seeks to achieve lower costs by
keeping
portfolio turnover low in comparison to actively managed investment
companies.
The
Fund may invest in derivative instruments, such as options, futures contracts
or swap agreements. The Fund may purchase and sell securities on
a when-issued, delayed delivery or forward commitment basis. The Fund
may,
without limitation, seek to obtain market exposure to the securities in
which
it primarily invests by entering into a series of purchase and sale contracts
or by using other investment techniques (such as buy backs). The “total
return” sought by the Fund consists of income earned on the Fund’s investments,
plus capital appreciation, if any, which generally arises from decreases
in interest rates.
PIMCO
ETF Trust PROSPECTUS1
PIMCO
25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund
Principal
Risks
It
is possible to lose money on an investment in the
Fund.
The principal risks of
investing in the Fund, which could adversely affect its net asset value,
yield
and total return, are listed below.
Market
Trading Risk:
the risk that an active secondary trading market for
Fund shares does not continue once developed, that the Fund may not continue
to meet a listing exchange’s trading or listing requirements, or that
Fund shares trade at prices other than the Fund’s net asset
value
Interest
Rate Risk:
the risk that fixed income securities will decline in value
because of an increase in interest rates; a fund with a longer average
portfolio
duration will be more sensitive to changes in interest rates than a fund
with a shorter average portfolio duration
Call
Risk:
the risk that an issuer may exercise its right to redeem a fixed income
security earlier than expected (a call). Issuers may call outstanding
securities
prior to their maturity for a number of reasons (e.g.,
declining interest
rates, changes in credit spreads and improvements in the issuer’s credit
quality). If an issuer calls a security that the Fund has invested in, the
Fund
may not recoup the full amount of its initial investment and may be forced
to reinvest in lower-yielding securities, securities with greater credit
risks
or securities with other, less favorable features
Credit
Risk:
the risk that the Fund could lose money if the issuer or guarantor
of a fixed income security, or the counterparty to a derivative contract,
is unable or unwilling, or is perceived (whether by market participants,
rating agencies, pricing services or otherwise) as unable or unwilling,
to meet its financial obligations
Market
Risk:
the risk that the value of securities owned by the Fund may go
up or down, sometimes rapidly or unpredictably, due to factors affecting
securities
markets generally or particular industries
Liquidity
Risk:
the risk that a particular investment may be difficult to purchase
or sell and that the Fund may be unable to sell illiquid investments
at
an advantageous time or price or achieve its desired level of exposure to
a
certain sector. Liquidity risk may result from the lack of an active market,
reduced
number and capacity of traditional market participants to make a market
in fixed income securities, and may be magnified in a rising interest
rate
environment or other circumstances where investor redemptions from fixed
income funds may be higher than normal, causing increased supply in
the
market due to selling activity
Derivatives
Risk:
the risk of investing in derivative instruments (such as futures,
swaps and structured securities), including leverage, liquidity, interest
rate, market, credit and management risks, and valuation complexity.
Changes in the value of a derivative may not correlate perfectly with,
and may be more sensitive to market events than, the underlying asset,
rate or index, and the Fund could lose more than the initial amount invested.
The Fund’s use of derivatives may result in losses to the Fund, a reduction
in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”)
derivatives are also subject to the risk that a counterparty to the transaction
will not fulfill its contractual obligations to the other party, as many
of the protections afforded to centrally-cleared derivative transactions
might
not be available for OTC derivatives. The primary credit risk on derivatives
that are exchange-traded or traded through a central clearing counterparty
resides with the Fund’s clearing broker, or the clearinghouse.
Changes in
regulation relating to a fund’s use of derivatives and related instruments
could potentially limit or impact the Fund’s ability to invest in derivatives,
limit the Fund’s ability to employ certain strategies that use derivatives
and/or adversely affect the value of derivatives and the Fund’s performance
Leveraging
Risk:
the risk that certain transactions of the Fund, such as reverse
repurchase agreements, loans of portfolio securities, and the use of
when-issued,
delayed delivery or forward commitment transactions, or derivative
instruments, may give rise to leverage, magnifying gains and losses
and causing the Fund to be more volatile than if it had not been leveraged.
This means that leverage entails a heightened risk of
loss
Management
and Tracking Error Risk:
the risk that the portfolio manager’s
investment decisions may not produce the desired results or that the
Fund’s portfolio may not closely track the Underlying Index for a number
of reasons. The Fund incurs operating expenses, which are not applicable
to the Underlying Index, and the costs of buying and selling securities,
especially when rebalancing the Fund’s portfolio to reflect changes
in the composition of the Underlying Index. Performance of the Fund
and the Underlying Index may vary due to asset valuation differences
and
differences between the Fund’s portfolio and the Underlying Index due
to
legal restrictions, cost or liquidity restraints. The risk that performance of
the
Fund and the Underlying Index may vary may be heightened during periods
of increased market volatility or other unusual market conditions. In
addition,
the Fund’s use of a representative sampling approach may cause the
Fund to be less correlated to the return of the Underlying Index than if
the
Fund held all of the securities in the Underlying Index
Indexing
Risk:
the risk that the Fund is negatively affected by general declines
in the asset classes represented by the Underlying
Index
Please
see “Description of Principal Risks” in the Fund’s prospectus for a more
detailed description of the risks of investing in the Fund.
An
investment
in the Fund is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency.
Performance
Information
The
performance information shows summary performance information for the
Fund in a bar chart and an Average Annual Total Returns table. The information
provides some indication of the risks of investing in the Fund by showing
changes in its performance from year to year and by showing how the
Fund’s average annual returns compare with the returns of a broad-based
securities market index. Absent any applicable fee waivers and/or expense
limitations, performance would have been lower. The
Fund’s past performance,
before and after taxes, is not necessarily an indication of how the
Fund will perform in the future.
ICE
BofA Long US Treasury Principal STRIPS Index is an unmanaged index
comprised
of long maturity STRIPS representing the final principal payment
of
U.S. Treasury bonds. Performance for the Fund is updated daily and quarterly
and may be obtained as follows: daily and quarterly updates on the
net asset value and performance page at https://www.pimco.com/en-us/investments/etf.
2PROSPECTUS |
PIMCO ETF Trust
Calendar
Year Total Returns*
.
*The
year-to-date return as of September
30, 2020
is 30.02%.
For the periods shown in the
bar chart, the
highest quarterly return was 58.47% in
the Q3
2011,
and the
lowest quarterly
return was -18.24% in
the Q4
2016.
Average
Annual Total Returns (for periods ended 12/31/2019)
|
|
|
|
|
1
Year |
5
Years |
10
Years |
Return
Before Taxes |
21.22% |
5.00% |
10.29% |
Return
After Taxes on Distributions(1)
|
% |
% |
% |
Return
After Taxes on Distributions and Sales of Fund Shares(1)
|
% |
% |
% |
ICE
BofA Long U.S. Treasury Principal STRIPS Index (reflects
no deductions for fees, expenses or taxes) |
22.36% |
5.33% |
10.49% |
1 |
After-tax
returns are calculated using the highest historical individual federal
marginal income
tax rates and do not reflect the impact of state and local taxes.
Actual
after-tax returns
depend on an investor’s tax situation and may differ from those shown, and
the after-tax
returns shown are not relevant to investors who hold their Fund shares
through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
In
some cases the return after taxes may exceed the return before taxes due
to
an assumed tax benefit from any losses on a sale of Fund shares at the end
of the measurement
period. |
Investment
Adviser/Portfolio Managers
.
.
PIMCO
serves as the investment adviser for
the Fund.
The Fund’s
portfolio is jointly
and primarily managed by Matt Dorsten
and Graham Rennison. Mr. Dorsten
is an Executive Vice President of PIMCO
and Mr. Rennison is a Senior Vice President
of PIMCO. Mr. Dorsten has jointly and primarily managed the Fund
since December
2015. Mr. Rennison has jointly and primarily managed
the Fund since October
2018.
Other
Important Information Regarding Fund
Shares
For
important information about purchase and sale of Fund shares, tax information,
and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary of Other Important Information
Regarding Fund Shares” section on page 19 of
this prospectus.
October
30, 2020 PROSPECTUS3
.
PIMCO
1-5 Year U.S. TIPS Index Exchange-Traded
Fund
Investment
Objective
The Fund
seeks to provide total return that closely corresponds, before fees and
expenses, to the total return of ICE BofA 1-5 Year US Inflation-Linked
Treasury
Index.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund.
You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are
not reflected in the tables and examples below.
Shareholder
Fees (fees paid directly from your investment):
N/A
Annual
Fund
Operating Expenses (expenses that you pay each year
as a percentage of the value of your investment):
|
|
Management
Fees |
0.20% |
Total
Annual Fund Operating Expenses |
0.20% |
Example.
The
Example is intended to help you compare the cost of investing
in the Fund with the costs of investing in other exchange-traded funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated, and then sell all of your shares at the end of those
periods.
The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses remain the same. Investors
may pay brokerage commissions on their purchases and sales of Fund
shares, which are not reflected in the Example. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$20 |
$64 |
$113 |
$255 |
Portfolio
Turnover
The
Fund pays transaction costs when it buys and sells securities (or “turns
over”
its portfolio). A higher portfolio turnover rate may indicate higher
transaction
costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in the Annual
Fund
Operating Expenses or in the Example tables, affect the Fund’s performance.
During the most recent fiscal year, the Fund’s portfolio turnover
rate was 30%
of the average value of its portfolio.
Principal
Investment Strategies
The
Fund seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its total assets (exclusive of collateral
held
from securities lending) in the component securities (“Component Securities”)
of ICE
BofA 1-5 Year US Inflation-Linked Treasury Index (the “Underlying
Index”). The Fund may invest the remainder of its assets in Fixed
Income Instruments that are not Component Securities, but which Pacific
Investment Management Company LLC (“PIMCO”) believes will help
the Fund track its Underlying Index, as well as in cash and investment
grade,
liquid short-term instruments, forwards or derivatives, such as options,
futures contracts or swap agreements, and shares of affiliated bond
funds. “Fixed Income Instruments” include bonds, debt securities and
other
similar instruments issued by various U.S. and non-U.S. public- or
private-sector
entities. The dollar-weighted average portfolio maturity of this Fund
will closely correspond to the average maturity of its Underlying Index,
which as of September
30, 2020 was 3.15
years.
The
Underlying Index is an unmanaged index comprised of Treasury Inflation-Protected
Securities (“TIPS”) with a maturity of at least 1 year and less
than 5 years. TIPS are publicly issued, dollar denominated U.S. Government
securities issued by the U.S. Treasury that have principal and interest
payments linked to official inflation (as measured by the Consumer
Price
Index, or CPI). Their payments are supported by the full faith and credit
of the United States. The TIPS in the Underlying Index have a minimum
$1 billion of outstanding face value, have 1 to 5 years remaining to
maturity and have interest and principal payments tied to inflation.
Original
issue zero coupon bonds can be included in the Underlying Index and
the amounts outstanding of qualifying coupon securities are not reduced
by any portions that have been stripped. As of September
30, 2020,
there were 14 TIPS
issues in the Underlying Index. The Underlying Index
is capitalization-weighted and the composition of TIPS is updated monthly.
Intra-month cash flows are reinvested daily, at the beginning-of-month
1-month LIBID rate, until the end of the month at which point all cash
is removed from the Underlying Index. It is not possible to invest directly
in the Underlying Index. The Underlying Index does not reflect deductions
for fees, expenses or taxes.
PIMCO
uses an indexing approach in managing the Fund’s investments. The
Fund employs a representative sampling strategy in seeking to achieve
its
investment objective. In using this strategy, PIMCO seeks to invest in a
combination
of Component Securities and other instruments, or in Component
Securities but in different proportions as compared to the weighting
of the Underlying Index, such that the portfolio effectively provides
exposure to the Underlying Index. In using a representative sampling
strategy, the Fund may not track its Underlying Index with the same
degree of accuracy as a fund that replicates the composition and weighting
of the Underlying Index. Unlike many investment companies, the Fund
does not attempt to outperform the index the Fund tracks. An indexing
approach may eliminate the chance that the Fund will substantially
outperform its Underlying Index but also may reduce some of the
risks of active management. Indexing seeks to achieve lower costs by
keeping
portfolio turnover low in comparison to actively managed investment
companies.
The
Fund may invest in derivative instruments, such as options, futures contracts
or swap agreements. The Fund may purchase and sell securities on
a when-issued, delayed delivery or forward commitment basis. The Fund
may,
without limitation, seek to obtain market exposure to the securities in
which
it primarily invests by entering into a series of purchase and sale contracts
or by using other investment techniques (such as buy backs). The “total
return” sought by the Fund consists of income earned on the Fund’s investments,
plus capital appreciation, if any, which generally arises from decreases
in real interest rates and in the case of inflation-linked bonds, increased
inflation.
PIMCO
ETF Trust PROSPECTUS4
Principal
Risks
It
is possible to lose money on an investment in the
Fund.
The principal risks of
investing in the Fund, which could adversely affect its net asset value,
yield
and total return, are listed below.
Market
Trading Risk:
the risk that an active secondary trading market for
Fund shares does not continue once developed, that the Fund may not continue
to meet a listing exchange’s trading or listing requirements, or that
Fund shares trade at prices other than the Fund’s net asset
value
Interest
Rate Risk:
the risk that fixed income securities will decline in value
because of an increase in interest rates; a fund with a longer average
portfolio
duration will be more sensitive to changes in interest rates than a fund
with a shorter average portfolio duration
Call
Risk:
the risk that an issuer may exercise its right to redeem a fixed income
security earlier than expected (a call). Issuers may call outstanding
securities
prior to their maturity for a number of reasons (e.g.,
declining interest
rates, changes in credit spreads and improvements in the issuer’s credit
quality). If an issuer calls a security that the Fund has invested in, the
Fund
may not recoup the full amount of its initial investment and may be forced
to reinvest in lower-yielding securities, securities with greater credit
risks
or securities with other, less favorable features
Inflation-Indexed
Security Risk:
the risk that inflation-indexed debt securities
are subject to the effects of changes in market interest rates caused
by factors other than inflation (real interest rates). In general, the
value
of an inflation-indexed security, including TIPS, tends to decrease when
real interest rates increase and can increase when real interest rates
decrease.
Interest payments on inflation-indexed securities are unpredictable
and will fluctuate as the principal and interest are adjusted for
inflation. There can be no assurance that the inflation index used will
accurately
measure the real rate of inflation in the prices of goods and services.
Any increase in the principal amount of an inflation-indexed debt security
will be considered taxable ordinary income, even though the Fund will
not receive the principal until maturity
Credit
Risk:
the risk that the Fund could lose money if the issuer or guarantor
of a fixed income security, or the counterparty to a derivative contract,
is unable or unwilling, or is perceived (whether by market participants,
rating agencies, pricing services or otherwise) as unable or unwilling,
to meet its financial obligations
Market
Risk:
the risk that the value of securities owned by the Fund may go
up or down, sometimes rapidly or unpredictably, due to factors affecting
securities
markets generally or particular industries
Liquidity
Risk:
the risk that a particular investment may be difficult to purchase
or sell and that the Fund may be unable to sell illiquid investments
at
an advantageous time or price or achieve its desired level of exposure to
a
certain sector. Liquidity risk may result from the lack of an active market,
reduced
number and capacity of traditional market participants to make a market
in fixed income securities, and may be magnified in a rising interest
rate
environment or other circumstances where investor redemptions from fixed
income funds may be higher than normal, causing increased supply in
the
market due to selling activity
Derivatives
Risk:
the risk of investing in derivative instruments (such as futures,
swaps and structured securities), including leverage, liquidity, interest
rate, market, credit and management risks, and valuation complexity.
Changes in the value of a derivative may not correlate perfectly with,
and may be more sensitive to market events than, the underlying asset,
rate or index, and the Fund could lose more than the initial amount invested.
The Fund’s use of derivatives may result in losses to the Fund, a reduction
in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”)
derivatives are also subject to the risk that a counterparty to the transaction
will not fulfill its contractual obligations to the other party, as many
of the protections afforded to centrally-cleared derivative transactions
might
not be available for OTC derivatives. The primary credit risk on derivatives
that are exchange-traded or traded through a central clearing counterparty
resides with the Fund’s clearing broker, or the clearinghouse. Changes
in regulation relating to a fund’s use of derivatives and related instruments
could potentially limit or impact the Fund’s ability to invest in derivatives,
limit the Fund’s ability to employ certain strategies that use derivatives
and/or adversely affect the value of derivatives and the Fund’s performance
Leveraging
Risk:
the risk that certain transactions of the Fund, such as reverse
repurchase agreements, loans of portfolio securities, and the use of
when-issued,
delayed delivery or forward commitment transactions, or derivative
instruments, may give rise to leverage, magnifying gains and losses
and causing the Fund to be more volatile than if it had not been leveraged.
This means that leverage entails a heightened risk of
loss
Management
and Tracking Error Risk:
the risk that the portfolio manager’s
investment decisions may not produce the desired results or that the
Fund’s portfolio may not closely track the Underlying Index for a number
of reasons. The Fund incurs operating expenses, which are not applicable
to the Underlying Index, and the costs of buying and selling securities,
especially when rebalancing the Fund’s portfolio to reflect changes
in the composition of the Underlying Index. Performance of the Fund
and the Underlying Index may vary due to asset valuation differences
and
differences between the Fund’s portfolio and the Underlying Index due
to
legal restrictions, cost or liquidity restraints. The risk that performance of
the
Fund and the Underlying Index may vary may be heightened during periods
of increased market volatility or other unusual market conditions. In
addition,
the Fund’s use of a representative sampling approach may cause the
Fund to be less correlated to the return of the Underlying Index than if
the
Fund held all of the securities in the Underlying Index
Indexing
Risk:
the risk that the Fund is negatively affected by general declines
in the asset classes represented by the Underlying
Index
Please
see “Description of Principal Risks” in the Fund’s prospectus for a more
detailed description of the risks of investing in the Fund.
An
investment
in the Fund is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency.
Performance
Information
The
performance information shows summary performance information for the
Fund in a bar chart and an Average Annual Total Returns table. The information
provides some indication of the risks of investing in the Fund by
October
30, 2020 PROSPECTUS5
PIMCO
1-5 Year U.S. TIPS Index Exchange-Traded Fund
showing
changes in its performance from year to year and by showing how the Fund’s
average annual returns compare with the returns of a broad-based
securities market index. Absent any applicable fee waivers and/or expense
limitations, performance would have been lower. The
Fund’s past performance,
before and after taxes, is not necessarily an indication of how the
Fund will perform in the future.
ICE
BofA 1-5 Year US Inflation-Linked Treasury Index is an unmanaged
index
comprised of TIPS with a maturity of at least 1 year and less than 5
years.
Performance for the Fund is updated daily and quarterly and may be obtained
as follows: daily and quarterly updates on the net asset value and performance
page at https://www.pimco.com/en-us/investments/etf.
Calendar
Year Total Returns*
.
*The
year-to-date return as of September
30, 2020
is 3.95%.
For the periods shown in the bar
chart, the
highest quarterly return was 2.28% in
the Q1
2011,
and the
lowest quarterly return
was -2.89% in
the Q2
2013.
Average
Annual Total Returns (for periods ended 12/31/2019)
|
|
|
|
|
1
Year |
5
Years |
10
Years |
Return
Before Taxes |
4.84% |
1.62% |
1.52% |
Return
After Taxes on Distributions(1)
|
% |
% |
% |
Return
After Taxes on Distributions and Sales of Fund Shares(1)
|
% |
% |
% |
ICE
BofA 1-5 Year U.S. Inflation-Linked Treasury Index (reflects
no deductions for fees, expenses or taxes) |
5.08% |
1.84% |
1.74% |
1 |
After-tax
returns are calculated using the highest historical individual federal
marginal income
tax rates and do not reflect the impact of state and local taxes.
Actual
after-tax returns
depend on an investor’s tax situation and may differ from those shown, and
the after-tax
returns shown are not relevant to investors who hold their Fund shares
through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
In
some cases the return after taxes may exceed the return before taxes due
to
an assumed tax benefit from any losses on a sale of Fund shares at the end
of the measurement
period. |
Investment
Adviser/Portfolio Managers
.
.
PIMCO
serves as the investment adviser for
the Fund.
The Fund’s
portfolio is jointly
and primarily managed by Matt Dorsten
and Graham Rennison. Mr. Dorsten
is an Executive Vice President of PIMCO
and Mr. Rennison is a Senior Vice President
of PIMCO. Mr. Dorsten has jointly and primarily managed the Fund
since December
2015. Mr. Rennison has jointly and primarily managed
the Fund since October
2018.
Other
Important Information Regarding Fund
Shares
For
important information about purchase and sale of Fund shares, tax information,
and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary of Other Important Information
Regarding Fund Shares” section on page 19 of
this prospectus.
6PROSPECTUS |
PIMCO ETF Trust
.
PIMCO
15+ Year U.S. TIPS Index Exchange-Traded
Fund
Investment
Objective
The Fund
seeks to provide total return that closely corresponds, before fees and
expenses, to the total return of ICE BofA 15+ Year US Inflation-Linked
Treasury
Index.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund.
You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are
not reflected in the tables and examples below.
Shareholder
Fees (fees paid directly from your investment):
N/A
Annual
Fund
Operating Expenses (expenses that you pay each year
as a percentage of the value of your investment):
|
|
Management
Fees |
0.20% |
Total
Annual Fund Operating Expenses |
0.20% |
Example.
The
Example is intended to help you compare the cost of investing
in the Fund with the costs of investing in other exchange-traded funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated, and then sell all of your shares at the end of those
periods.
The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses remain the same. Investors
may pay brokerage commissions on their purchases and sales of Fund
shares, which are not reflected in the Example. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$20 |
$64 |
$113 |
$255 |
Portfolio
Turnover
The
Fund pays transaction costs when it buys and sells securities (or “turns
over”
its portfolio). A higher portfolio turnover rate may indicate higher
transaction
costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in the Annual
Fund
Operating Expenses or in the Example tables, affect the Fund’s performance.
During the most recent fiscal year, the Fund’s portfolio turnover
rate was 9%
of the average value of its portfolio.
Principal
Investment Strategies
The
Fund seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its total assets (exclusive of collateral
held
from securities lending) in the component securities (“Component Securities”)
of ICE
BofA 15+ Year US Inflation-Linked Treasury Index (the “Underlying
Index”). The Fund may invest the remainder of its assets in Fixed
Income Instruments that are not Component Securities, but which Pacific
Investment Management Company LLC (“PIMCO”) believes will help
the Fund track its Underlying Index, as well as in cash and investment
grade,
liquid short-term instruments, forwards or derivatives, such as options,
futures contracts or swap agreements, and shares of affiliated bond
funds. “Fixed Income Instruments” include bonds, debt securities and
other
similar instruments issued by various U.S. and non-U.S. public- or
private-sector
entities. The dollar-weighted average portfolio maturity of this Fund
will closely correspond to the average maturity of its Underlying Index,
which as of September
30, 2020 was 23.87
years.
The
Underlying Index is an unmanaged index comprised of Treasury Inflation-Protected
Securities (“TIPS”) with a maturity of at least 15 years. TIPS
are publicly issued, dollar denominated U.S. Government securities issued
by the U.S. Treasury that have principal and interest payments linked
to official
inflation (as measured by the Consumer Price Index, or CPI). Their payments
are supported by the full faith and credit of the United States. The
TIPS in the Underlying Index have a minimum $1 billion of outstanding
face
value, have at least 15 years remaining to maturity and have interest
and
principal payments tied to inflation. Original issue zero coupon bonds
can
be included in the Underlying Index and the amounts outstanding of qualifying
coupon securities are not reduced by any portions that have been stripped.
As of September
30, 2020, there were 11 TIPS
issues in the Underlying
Index. The Underlying Index is capitalization-weighted and the composition
of TIPS is updated monthly. Intra-month cash flows are reinvested
daily, at the beginning-of-month 1-month LIBID rate, until the end
of the month at which point all cash is removed from the Underlying Index.
It is not possible to invest directly in the Underlying Index. The Underlying
Index does not reflect deductions for fees, expenses or
taxes.
PIMCO
uses an indexing approach in managing the Fund’s investments. The
Fund employs a representative sampling strategy in seeking to achieve
its
investment objective. In using this strategy, PIMCO seeks to invest in a
combination
of Component Securities and other instruments, or in Component
Securities but in different proportions as compared to the weighting
of the Underlying Index, such that the portfolio effectively provides
exposure to the Underlying Index. In using a representative sampling
strategy, the Fund may not track its Underlying Index with the same
degree of accuracy as a fund that replicates the composition and weighting
of the Underlying Index. Unlike many investment companies, the Fund
does not attempt to outperform the index the Fund tracks. An indexing
approach may eliminate the chance that the Fund will substantially
outperform its Underlying Index but also may reduce some of the
risks of active management. Indexing seeks to achieve lower costs by
keeping
portfolio turnover low in comparison to actively managed investment
companies.
The
Fund may invest in derivative instruments, such as options, futures contracts
or swap agreements. The Fund may purchase and sell securities on
a when-issued, delayed delivery or forward commitment basis. The Fund
may,
without limitation, seek to obtain market exposure to the securities in
which
it primarily invests by entering into a series of purchase and sale contracts
or by using other investment techniques (such as buy backs). The “total
return” sought by the Fund consists of income earned on the Fund’s investments,
plus capital appreciation, if any, which generally arises from decreases
in real interest rates and in the case of inflation-linked bonds, increased
inflation.
Principal
Risks
It
is possible to lose money on an investment in the
Fund.
The principal risks of
investing in the Fund, which could adversely affect its net asset value,
yield
and total return, are listed below.
PIMCO
ETF Trust PROSPECTUS7
PIMCO
15+ Year U.S. TIPS Index Exchange-Traded Fund
Market
Trading Risk:
the risk that an active secondary trading market for
Fund shares does not continue once developed, that the Fund may not continue
to meet a listing exchange’s trading or listing requirements, or that
Fund shares trade at prices other than the Fund’s net asset
value
Interest
Rate Risk:
the risk that fixed income securities will decline in value
because of an increase in interest rates; a fund with a longer average
portfolio
duration will be more sensitive to changes in interest rates than a fund
with a shorter average portfolio duration
Call
Risk:
the risk that an issuer may exercise its right to redeem a fixed income
security earlier than expected (a call). Issuers may call outstanding
securities
prior to their maturity for a number of reasons (e.g.,
declining interest
rates, changes in credit spreads and improvements in the issuer’s credit
quality). If an issuer calls a security that the Fund has invested in, the
Fund
may not recoup the full amount of its initial investment and may be forced
to reinvest in lower-yielding securities, securities with greater credit
risks
or securities with other, less favorable features
Inflation-Indexed
Security Risk:
the risk that inflation-indexed debt securities
are subject to the effects of changes in market interest rates caused
by factors other than inflation (real interest rates). In general, the
value
of an inflation-indexed security, including TIPS, tends to decrease when
real interest rates increase and can increase when real interest rates
decrease.
Interest payments on inflation-indexed securities are unpredictable
and will fluctuate as the principal and interest are adjusted for
inflation. There can be no assurance that the inflation index used will
accurately
measure the real rate of inflation in the prices of goods and services.
Any increase in the principal amount of an inflation-indexed debt security
will be considered taxable ordinary income, even though the Fund will
not receive the principal until maturity
Credit
Risk:
the risk that the Fund could lose money if the issuer or guarantor
of a fixed income security, or the counterparty to a derivative contract,
is unable or unwilling, or is perceived (whether by market participants,
rating agencies, pricing services or otherwise) as unable or unwilling,
to meet its financial obligations
Market
Risk:
the risk that the value of securities owned by the Fund may go
up or down, sometimes rapidly or unpredictably, due to factors affecting
securities
markets generally or particular industries
Liquidity
Risk:
the risk that a particular investment may be difficult to purchase
or sell and that the Fund may be unable to sell illiquid investments
at
an advantageous time or price or achieve its desired level of exposure to
a
certain sector. Liquidity risk may result from the lack of an active market,
reduced
number and capacity of traditional market participants to make a market
in fixed income securities, and may be magnified in a rising interest
rate
environment or other circumstances where investor redemptions from fixed
income funds may be higher than normal, causing increased supply in
the
market due to selling activity
Derivatives
Risk:
the risk of investing in derivative instruments (such as futures,
swaps and structured securities), including leverage, liquidity, interest
rate, market, credit and management risks, and valuation complexity.
Changes in the value of a derivative may not correlate perfectly with,
and may be more sensitive to market events than, the underlying asset,
rate or index, and the Fund could lose more than the initial amount
invested.
The Fund’s use of derivatives may result in losses to the Fund, a reduction
in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”)
derivatives are also subject to the risk that a counterparty to the transaction
will not fulfill its contractual obligations to the other party, as many of
the protections afforded to centrally-cleared derivative transactions
might not
be available for OTC derivatives. The primary credit risk on derivatives
that are exchange-traded or traded through a central clearing counterparty
resides with the Fund’s clearing broker, or the clearinghouse. Changes in
regulation relating to a fund’s use of derivatives and related instruments
could potentially limit or impact the Fund’s ability to invest in derivatives,
limit the Fund’s ability to employ certain strategies that use derivatives
and/or adversely affect the value of derivatives and the Fund’s performance
Leveraging
Risk:
the risk that certain transactions of the Fund, such as reverse
repurchase agreements, loans of portfolio securities, and the use of
when-issued,
delayed delivery or forward commitment transactions, or derivative
instruments, may give rise to leverage, magnifying gains and losses
and causing the Fund to be more volatile than if it had not been leveraged.
This means that leverage entails a heightened risk of
loss
Management
and Tracking Error Risk:
the risk that the portfolio manager’s
investment decisions may not produce the desired results or that the
Fund’s portfolio may not closely track the Underlying Index for a number
of reasons. The Fund incurs operating expenses, which are not applicable
to the Underlying Index, and the costs of buying and selling securities,
especially when rebalancing the Fund’s portfolio to reflect changes
in the composition of the Underlying Index. Performance of the Fund
and the Underlying Index may vary due to asset valuation differences
and
differences between the Fund’s portfolio and the Underlying Index due
to
legal restrictions, cost or liquidity restraints. The risk that performance of
the
Fund and the Underlying Index may vary may be heightened during periods
of increased market volatility or other unusual market conditions. In
addition,
the Fund’s use of a representative sampling approach may cause the
Fund to be less correlated to the return of the Underlying Index than if
the
Fund held all of the securities in the Underlying Index
Indexing
Risk:
the risk that the Fund is negatively affected by general declines
in the asset classes represented by the Underlying
Index
Please
see “Description of Principal Risks” in the Fund’s prospectus for a more
detailed description of the risks of investing in the Fund.
An
investment
in the Fund is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency.
Performance
Information
The
performance information shows summary performance information for the
Fund in a bar chart and an Average Annual Total Returns table. The information
provides some indication of the risks of investing in the Fund by showing
changes in its performance from year to year and by showing how the
Fund’s average annual returns compare with the returns of a broad-based
securities market index. Absent any applicable fee waivers and/or expense
limitations, performance would have been lower. The
Fund’s past performance,
before and after taxes, is not necessarily an indication of how the
Fund will perform in the future.
8PROSPECTUS |
PIMCO ETF Trust
ICE
BofA 15+ Year US Inflation-Linked Treasury Index is an unmanaged
index
comprised of TIPS with a maturity of at least 15 years. Performance for
the Fund is updated daily and quarterly and may be obtained as follows:
daily
and quarterly updates on the net asset value and performance page at
https://www.pimco.com/en-us/investments/etf.
Calendar
Year Total Returns*
.
*The
year-to-date return as of September
30, 2020
is 22.82%.
For the periods shown in the
bar chart, the
highest quarterly return was 12.67% in
the Q3
2011,
and the
lowest quarterly
return was -12.55% in
the Q2
2013.
Average
Annual Total Returns (for periods ended 12/31/2019)
|
|
|
|
|
1
Year |
5
Years |
10
Years |
Return
Before Taxes |
17.29% |
3.51% |
5.66% |
Return
After Taxes on Distributions(1)
|
% |
% |
% |
Return
After Taxes on Distributions and Sales of Fund Shares(1)
|
% |
% |
% |
ICE
BofA 15+ Year U.S. Inflation-Linked Treasury Index
(reflects no deductions for fees, expenses or taxes)
|
17.72% |
3.75% |
5.89% |
1 |
After-tax
returns are calculated using the highest historical individual federal
marginal income
tax rates and do not reflect the impact of state and local taxes.
Actual
after-tax returns
depend on an investor’s tax situation and may differ from those shown, and
the after-tax
returns shown are not relevant to investors who hold their Fund shares
through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
In
some cases the return after taxes may exceed the return before taxes due
to
an assumed tax benefit from any losses on a sale of Fund shares at the end
of the measurement
period. |
Investment
Adviser/Portfolio Managers
.
.
PIMCO
serves as the investment adviser for
the Fund.
The Fund’s
portfolio is jointly
and primarily managed by Matt Dorsten
and Graham Rennison. Mr. Dorsten
is an Executive Vice President of PIMCO
and Mr. Rennison is a Senior Vice President
of PIMCO. Mr. Dorsten has jointly and primarily managed the Fund
since December
2015. Mr. Rennison has jointly and primarily managed
the Fund since October
2018.
Other
Important Information Regarding Fund
Shares
For
important information about purchase and sale of Fund shares, tax information,
and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary of Other Important Information
Regarding Fund Shares” section on page 19 of
this prospectus.
October
30, 2020 PROSPECTUS9
.
PIMCO
Broad U.S. TIPS Index Exchange-Traded
Fund
Investment
Objective
The Fund
seeks to provide total return that closely corresponds, before fees and
expenses, to the total return of ICE BofA US Inflation-Linked Treasury
Index.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund.
You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are
not reflected in the tables and examples below.
Shareholder
Fees (fees paid directly from your investment):
N/A
Annual
Fund
Operating Expenses (expenses that you pay each year
as a percentage of the value of your investment):
|
|
Management
Fees |
0.20% |
Total
Annual Fund Operating Expenses |
0.20% |
Example.
The
Example is intended to help you compare the cost of investing
in the Fund with the costs of investing in other exchange-traded funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated, and then sell all of your shares at the end of those
periods.
The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses remain the same. Investors
may pay brokerage commissions on their purchases and sales of Fund
shares, which are not reflected in the Example. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$20 |
$64 |
$113 |
$255 |
Portfolio
Turnover
The
Fund pays transaction costs when it buys and sells securities (or “turns
over”
its portfolio). A higher portfolio turnover rate may indicate higher
transaction
costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in the Annual
Fund
Operating Expenses or in the Example tables, affect the Fund’s performance.
During the most recent fiscal year, the Fund’s portfolio turnover
rate was 10%
of the average value of its portfolio.
Principal
Investment Strategies
The
Fund seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its total assets (exclusive of collateral
held
from securities lending) in the component securities (“Component Securities”)
of ICE
BofA US Inflation-Linked Treasury Index (the “Underlying Index”).
The Fund may invest the remainder of its assets in Fixed Income Instruments
that are not Component Securities, but which Pacific Investment
Management Company LLC (“PIMCO”) believes will help the Fund
track its Underlying Index, as well as in cash and investment grade,
liquid
short-term instruments, forwards or derivatives, such as options, futures
contracts or swap agreements, and shares of affiliated bond funds. “Fixed
Income Instruments” include bonds, debt securities and other similar
instruments
issued by various U.S. and non-U.S. public or private-sector
entities.
The dollar-weighted average portfolio maturity of this Fund will closely
correspond to the average maturity of its Underlying Index, which as
of
September
30, 2020 was 9.14 years.
The
Underlying Index is an unmanaged index comprised of Treasury Inflation-Protected
Securities (“TIPS”). TIPS are publicly issued, dollar denominated
U.S. Government securities issued by the U.S. Treasury that have
principal and interest payments linked to official inflation (as
measured
by the Consumer Price Index, or CPI). Their payments are supported
by the full faith and credit of the United States. The TIPS in the Underlying
Index have a minimum $1 billion of outstanding face value, have
at least 1 year remaining to maturity and have interest and principal
payments
tied to inflation. Original issue zero coupon bonds can be included
in the Underlying Index and the amounts outstanding of qualifying coupon
securities are not reduced by any portions that have been stripped. As
of September
30, 2020, there were 42 TIPS
issues in the Underlying Index.
The Underlying Index is capitalization-weighted and the composition of
TIPS is updated monthly. Intra-month cash flows are reinvested daily, at
the
beginning-of-month 1-month LIBID rate, until the end of the month at
which
point all cash is removed from the Underlying Index. It is not possible
to
invest directly in the Underlying Index. The Underlying Index does not
reflect
deductions for fees, expenses or taxes.
PIMCO
uses an indexing approach in managing the Fund’s investments. The
Fund employs a representative sampling strategy in seeking to achieve
its
investment objective. In using this strategy, PIMCO seeks to invest in a
combination
of Component Securities and other instruments, or in Component
Securities but in different proportions as compared to the weighting
of the Underlying Index, such that the portfolio effectively provides
exposure to the Underlying Index. In using a representative sampling
strategy, the Fund may not track its Underlying Index with the same
degree of accuracy as a fund that replicates the composition and weighting
of the Underlying Index. Unlike many investment companies, the Fund
does not attempt to outperform the index the Fund tracks. An indexing
approach may eliminate the chance that the Fund will substantially
outperform its Underlying Index but also may reduce some of the
risks of active management. Indexing seeks to achieve lower costs by
keeping
portfolio turnover low in comparison to actively managed investment
companies.
The
Fund may invest in derivative instruments, such as options, futures contracts
or swap agreements. The Fund may purchase and sell securities on
a when-issued, delayed delivery or forward commitment basis. The Fund
may,
without limitation, seek to obtain market exposure to the securities in
which
it primarily invests by entering into a series of purchase and sale contracts
or by using other investment techniques (such as buy backs). The “total
return” sought by the Fund consists of income earned on the Fund’s investments,
plus capital appreciation, if any, which generally arises from decreases
in real interest rates and in the case of inflation-linked bonds, increased
inflation.
Principal
Risks
It
is possible to lose money on an investment in the
Fund.
The principal risks of
investing in the Fund, which could adversely affect its net asset value,
yield
and total return, are listed below.
PIMCO
ETF Trust PROSPECTUS10
Small
Fund Risk:
the risk that a smaller fund may not achieve investment or
trading efficiencies. Additionally, a smaller fund may be more adversely
affected
by large purchases or redemptions of fund shares
Market
Trading Risk:
the risk that an active secondary trading market for
Fund shares does not continue once developed, that the Fund may not continue
to meet a listing exchange’s trading or listing requirements, or that
Fund shares trade at prices other than the Fund’s net asset
value
Interest
Rate Risk:
the risk that fixed income securities will decline in value
because of an increase in interest rates; a fund with a longer average
portfolio
duration will be more sensitive to changes in interest rates than a fund
with a shorter average portfolio duration
Call
Risk:
the risk that an issuer may exercise its right to redeem a fixed income
security earlier than expected (a call). Issuers may call outstanding
securities
prior to their maturity for a number of reasons (e.g.,
declining interest
rates, changes in credit spreads and improvements in the issuer’s credit
quality). If an issuer calls a security that the Fund has invested in, the
Fund
may not recoup the full amount of its initial investment and may be forced
to reinvest in lower-yielding securities, securities with greater credit
risks
or securities with other, less favorable features
Inflation-Indexed
Security Risk:
the risk that inflation-indexed debt securities
are subject to the effects of changes in market interest rates caused
by factors other than inflation (real interest rates). In general, the
value
of an inflation-indexed security, including TIPS, tends to decrease when
real interest rates increase and can increase when real interest rates
decrease.
Interest payments on inflation-indexed securities are unpredictable
and will fluctuate as the principal and interest are adjusted for
inflation. There can be no assurance that the inflation index used will
accurately
measure the real rate of inflation in the prices of goods and services.
Any increase in the principal amount of an inflation-indexed debt security
will be considered taxable ordinary income, even though the Fund will
not receive the principal until maturity
Credit
Risk:
the risk that the Fund could lose money if the issuer or guarantor
of a fixed income security, or the counterparty to a derivative contract,
is unable or unwilling, or is perceived (whether by market participants,
rating agencies, pricing services or otherwise) as unable or unwilling,
to meet its financial obligations
Market
Risk:
the risk that the value of securities owned by the Fund may go
up or down, sometimes rapidly or unpredictably, due to factors affecting
securities
markets generally or particular industries
Liquidity
Risk:
the risk that a particular investment may be difficult to purchase
or sell and that the Fund may be unable to sell illiquid investments
at
an advantageous time or price or achieve its desired level of exposure to
a
certain sector. Liquidity risk may result from the lack of an active market,
reduced
number and capacity of traditional market participants to make a market
in fixed income securities, and may be magnified in a rising interest
rate
environment or other circumstances where investor redemptions from fixed
income funds may be higher than normal, causing increased supply in
the
market due to selling activity
Derivatives
Risk:
the risk of investing in derivative instruments (such as futures,
swaps and structured securities), including leverage, liquidity, interest
rate, market, credit and management risks, and valuation
complexity.
Changes in the value of a derivative may not correlate perfectly with, and
may be more sensitive to market events than, the underlying asset,
rate or index, and the Fund could lose more than the initial amount invested.
The Fund’s use of derivatives may result in losses to the Fund, a reduction
in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”)
derivatives are also subject to the risk that a counterparty to the transaction
will not fulfill its contractual obligations to the other party, as many of
the protections afforded to centrally-cleared derivative transactions
might not
be available for OTC derivatives. The primary credit risk on derivatives
that are exchange-traded or traded through a central clearing counterparty
resides with the Fund’s clearing broker, or the clearinghouse. Changes in
regulation relating to a fund’s use of derivatives and related instruments
could potentially limit or impact the Fund’s ability to invest in derivatives,
limit the Fund’s ability to employ certain strategies that use derivatives
and/or adversely affect the value of derivatives and the Fund’s performance
Leveraging
Risk:
the risk that certain transactions of the Fund, such as reverse
repurchase agreements, loans of portfolio securities, and the use of
when-issued,
delayed delivery or forward commitment transactions, or derivative
instruments, may give rise to leverage, magnifying gains and losses
and causing the Fund to be more volatile than if it had not been leveraged.
This means that leverage entails a heightened risk of
loss
Management
and Tracking Error Risk:
the risk that the portfolio manager’s
investment decisions may not produce the desired results or that the
Fund’s portfolio may not closely track the Underlying Index for a number
of reasons. The Fund incurs operating expenses, which are not applicable
to the Underlying Index, and the costs of buying and selling securities,
especially when rebalancing the Fund’s portfolio to reflect changes
in the composition of the Underlying Index. Performance of the Fund
and the Underlying Index may vary due to asset valuation differences
and
differences between the Fund’s portfolio and the Underlying Index due
to
legal restrictions, cost or liquidity restraints. The risk that performance of
the
Fund and the Underlying Index may vary may be heightened during periods
of increased market volatility or other unusual market conditions. In
addition,
the Fund’s use of a representative sampling approach may cause the
Fund to be less correlated to the return of the Underlying Index than if
the
Fund held all of the securities in the Underlying Index
Indexing
Risk:
the risk that the Fund is negatively affected by general declines
in the asset classes represented by the Underlying
Index
Please
see “Description of Principal Risks” in the Fund’s prospectus for a more
detailed description of the risks of investing in the Fund.
An
investment
in the Fund is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency.
Performance
Information
The
performance information shows summary performance information for the
Fund in a bar chart and an Average Annual Total Returns table. The information
provides some indication of the risks of investing in the Fund by showing
changes in its performance from year to year and by showing how the
Fund’s average annual returns compare with the returns of a broad-based
securities market index. Absent any applicable fee waivers and/or
October
30, 2020 PROSPECTUS11
PIMCO
Broad U.S. TIPS Index Exchange-Traded Fund
expense
limitations, performance would have been lower. The
Fund’s past performance,
before and after taxes, is not necessarily an indication of how the
Fund will perform in the future.
ICE
BofA US Inflation-Linked Treasury Index is an unmanaged index comprised
of TIPS. Performance for the Fund is updated daily and quarterly and
may be obtained as follows: daily and quarterly updates on the net asset
value and performance page at https://www.pimco.com/en-us/investments/etf.
Calendar
Year Total Returns*
.
*The
year-to-date return as of September
30, 2020
is 9.61%.
For the periods shown in the bar
chart, the
highest quarterly return was 5.08% in
the Q3
2011,
and the
lowest quarterly return
was -7.40% in
the Q2
2013.
Average
Annual Total Returns (for periods ended 12/31/2019)
|
|
|
|
|
1
Year |
5
Years |
10
Years |
Return
Before Taxes |
8.47% |
2.46% |
3.27% |
Return
After Taxes on Distributions(1)
|
% |
% |
% |
Return
After Taxes on Distributions and Sales of Fund Shares(1)
|
% |
% |
% |
ICE
BofA U.S. Inflation-Linked Treasury Index (reflects no
deductions for fees, expenses or taxes) |
8.77% |
2.67% |
3.48% |
1 |
After-tax
returns are calculated using the highest historical individual federal
marginal income
tax rates and do not reflect the impact of state and local taxes.
Actual
after-tax returns
depend on an investor’s tax situation and may differ from those shown, and
the after-tax
returns shown are not relevant to investors who hold their Fund shares
through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
In
some cases the return after taxes may exceed the return before taxes due
to
an assumed tax benefit from any losses on a sale of Fund shares at the end
of the measurement
period. |
Investment
Adviser/Portfolio Managers
.
.
PIMCO
serves as the investment adviser for
the Fund.
The Fund’s
portfolio is jointly
and primarily managed by Matt Dorsten
and Graham Rennison. Mr. Dorsten
is an Executive Vice President of PIMCO
and Mr. Rennison is a Senior Vice President
of PIMCO. Mr. Dorsten has jointly and primarily managed the Fund
since December
2015. Mr. Rennison has jointly and primarily managed
the Fund since October
2018.
Other
Important Information Regarding Fund
Shares
For
important information about purchase and sale of Fund shares, tax information,
and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary of Other Important Information
Regarding Fund Shares” section on page 19 of
this prospectus.
12PROSPECTUS |
PIMCO ETF Trust
.
PIMCO
0-5 Year High Yield Corporate Bond
Index Exchange-Traded Fund
Investment
Objective
The Fund
seeks to provide total return that closely corresponds, before fees and
expenses, to the total return of ICE BofA 0-5 Year US High Yield
Constrained
Index.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund.
You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are
not reflected in the tables and examples below.
Shareholder
Fees (fees paid directly from your investment):
N/A
Annual
Fund
Operating Expenses (expenses that you pay each year
as a percentage of the value of your investment):
|
|
Management
Fees |
0.55% |
Other
Expenses(1)
|
% |
Total
Annual Fund Operating Expenses |
0.56% |
1 |
“Other
Expenses” include interest expense of 0.01%.
Interest expense is borne by the Fund separately
from the management fees paid to Pacific Investment Management
Company
LLC (“PIMCO”). Excluding interest expense, Total Annual Fund Operating
Expenses
are 0.55%.
|
Example.
The
Example is intended to help you compare the cost of investing
in the Fund with the costs of investing in other exchange-traded funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated, and then sell all of your shares at the end of those
periods.
The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses remain the same. Investors
may pay brokerage commissions on their purchases and sales of Fund
shares, which are not reflected in the Example. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$57 |
$179 |
$313 |
$701 |
Portfolio
Turnover
The
Fund pays transaction costs when it buys and sells securities (or “turns
over”
its portfolio). A higher portfolio turnover rate may indicate higher
transaction
costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in the Annual
Fund
Operating Expenses or in the Example tables, affect the Fund’s performance.
During the most recent fiscal year, the Fund’s portfolio turnover
rate was 36%
of the average value of its portfolio.
Principal
Investment Strategies
The
Fund seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its total assets (exclusive of collateral
held
from securities lending) in the component securities (“Component Securities”)
of ICE
BofA 0-5 Year US High Yield Constrained Index (the “Underlying
Index”). The Fund may invest the remainder of its assets in Fixed
Income Instruments that are not Component Securities, but which PIMCO
believes will help the Fund track its Underlying Index, as well as in
cash and
investment grade, liquid short-term instruments, forwards or derivatives,
such as options, futures contracts or swap agreements, and shares of
affiliated bond funds. “Fixed Income Instruments” include bonds, debt
securities and other similar instruments issued by various U.S. and non-U.S.
public- or private-sector entities. The average portfolio duration of
this Fund
will closely correspond to the portfolio duration of the securities comprising
its Underlying Index, as calculated by PIMCO, which as of September
30, 2020 was 1.96 years.
Duration is a measure used to determine
the sensitivity of a security’s price to changes in interest rates. The longer
a security’s duration, the more sensitive it will be to changes in interest
rates.
The
Underlying Index is an unmanaged index comprised of U.S. dollar denominated
below investment grade corporate debt securities publicly issued
in the U.S. domestic market with remaining maturities of less than 5
years.
Underlying Index constituents are capitalization-weighted, based on their
current amount outstanding, provided the total allocation to an individual
issuer does not exceed 2%. As of September
30, 2020, there were 951 issues
in the Underlying Index. The securities comprising the Underlying
Index have a below investment grade rating (based on an average
of the ratings of Moody’s Investors Service, Inc. (“Moody’s”), Standard
& Poor’s Ratings Services (“S&P”) and Fitch, Inc. (“Fitch”)) and a
country
of risk exposure to investment grade countries that are members of the
FX-G10, Western Europe or territories of the U.S. and Western Europe.
Country
ratings are based on an average of Moody’s, S&P and Fitch foreign
currency
long term sovereign debt ratings. For each issuer, the country of risk
is the principal place of business derived from management location,
country
of primary listing, location of sales and reporting currency. In addition,
qualifying securities must have a minimum $250 million of outstanding
face value and a fixed coupon schedule. Original issue zero coupon
bonds, debt issued simultaneously in the Eurobond and U.S. domestic
bond markets, 144A securities and pay-in-kind securities qualify for
inclusion in the Underlying Index. Callable perpetual securities qualify for
inclusion
in the Underlying Index provided they are at least one year from the
first call date. Fixed-to-floating rate securities also qualify provided they
are
callable within the fixed rate period and are at least one year from last
call
prior to the date the bond transitions from a fixed to a floating rate
security.
The Underlying Index is capitalization-weighted, provided the total allocation
to an individual issuer does not exceed 2%, and the composition of
Component Securities is updated monthly. Cash flows from bond payments
that are received during the month are retained in the Underlying Index,
without earning reinvestment income, until removal at the end of the
month
as part of the rebalancing. It is not possible to invest directly in the
Underlying
Index. The Underlying Index does not reflect deductions for fees, expenses
or taxes.
PIMCO
uses an indexing approach in managing the Fund’s investments. The
Fund employs a representative sampling strategy in seeking to achieve
its
investment objective. In using this strategy, PIMCO seeks to invest in a
combination
of Component Securities and other instruments, or in Component
Securities but in different proportions as compared to the weighting
of the Underlying Index, such that the portfolio effectively provides
exposure to the Underlying Index. In using a representative sampling
strategy, the Fund may not track its Underlying Index with the same
degree of accuracy as a fund that replicates the composition and
PIMCO
ETF Trust PROSPECTUS13
PIMCO
0-5 Year High Yield Corporate Bond Index Exchange-Traded Fund
weighting
of the Underlying Index. Unlike many investment companies, the Fund does
not attempt to outperform the index the Fund tracks. An indexing
approach may eliminate the chance that the Fund will substantially
outperform its Underlying Index but also may reduce some of the risks
of active management. Indexing seeks to achieve lower costs by keeping
portfolio turnover low in comparison to actively managed investment
companies.
The
Fund may invest in derivative instruments, such as options, futures contracts
or swap agreements, and may invest in mortgage-related and other
asset-backed securities. The Fund may invest in U.S. dollar-denominated
securities of foreign issuers, including securities and instruments
economically tied to emerging market countries. The Fund may purchase
and sell securities on a when-issued, delayed delivery or forward commitment
basis. The Fund may, without limitation, seek to obtain market
exposure to the securities in which it primarily invests by entering
into
a series of purchase and sale contracts or by using other investment
techniques
(such as buy backs). The “total return” sought by the Fund consists
of income earned on the Fund’s investments, plus capital appreciation,
if any, which generally arises from decreases in interest
rates.
Principal
Risks
It
is possible to lose money on an investment in the
Fund.
The principal risks of
investing in the Fund, which could adversely affect its net asset value,
yield
and total return, are listed below.
Market
Trading Risk:
the risk that an active secondary trading market for
Fund shares does not continue once developed, that the Fund may not continue
to meet a listing exchange’s trading or listing requirements, or that
Fund shares trade at prices other than the Fund’s net asset
value
Interest
Rate Risk:
the risk that fixed income securities will decline in value
because of an increase in interest rates; a fund with a longer average
portfolio
duration will be more sensitive to changes in interest rates than a fund
with a shorter average portfolio duration
Call
Risk:
the risk that an issuer may exercise its right to redeem a fixed income
security earlier than expected (a call). Issuers may call outstanding
securities
prior to their maturity for a number of reasons (e.g.,
declining interest
rates, changes in credit spreads and improvements in the issuer’s credit
quality). If an issuer calls a security that the Fund has invested in, the
Fund
may not recoup the full amount of its initial investment and may be forced
to reinvest in lower-yielding securities, securities with greater credit
risks
or securities with other, less favorable features
Credit
Risk:
the risk that the Fund could lose money if the issuer or guarantor
of a fixed income security, or the counterparty to a derivative contract,
is unable or unwilling, or is perceived (whether by market participants,
rating agencies, pricing services or otherwise) as unable or unwilling,
to meet its financial obligations
High
Yield Risk:
the risk that high yield securities and unrated securities of
similar credit quality (commonly known as “junk bonds”) are subject to
greater
levels of credit, call and liquidity risks. High yield securities are
considered
primarily speculative with respect to the issuer’s continuing ability
to make principal and interest payments, and may be more volatile than
higher-rated securities of similar maturity
Market
Risk:
the risk that the value of securities owned by the Fund may go
up or down, sometimes rapidly or unpredictably, due to factors affecting
securities
markets generally or particular industries
Liquidity
Risk:
the risk that a particular investment may be difficult to purchase
or sell and that the Fund may be unable to sell illiquid investments
at
an advantageous time or price or achieve its desired level of exposure to
a
certain sector. Liquidity risk may result from the lack of an active market,
reduced
number and capacity of traditional market participants to make a market
in fixed income securities, and may be magnified in a rising interest
rate
environment or other circumstances where investor redemptions from fixed
income funds may be higher than normal, causing increased supply in
the
market due to selling activity
Issuer
Risk:
the risk that the value of a security may decline for a reason directly
related to the issuer, such as management performance, financial leverage
and reduced demand for the issuer’s goods or services
Derivatives
Risk:
the risk of investing in derivative instruments (such as futures,
swaps and structured securities), including leverage, liquidity, interest
rate, market, credit and management risks, and valuation complexity.
Changes in the value of a derivative may not correlate perfectly with,
and may be more sensitive to market events than, the underlying asset,
rate or index, and the Fund could lose more than the initial amount invested.
The Fund’s use of derivatives may result in losses to the Fund, a reduction
in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”)
derivatives are also subject to the risk that a counterparty to the transaction
will not fulfill its contractual obligations to the other party, as many
of the protections afforded to centrally-cleared derivative transactions
might
not be available for OTC derivatives. The primary credit risk on derivatives
that are exchange-traded or traded through a central clearing counterparty
resides with the Fund’s clearing broker, or the clearinghouse. Changes
in regulation relating to a fund’s use of derivatives and related instruments
could potentially limit or impact the Fund’s ability to invest in derivatives,
limit the Fund’s ability to employ certain strategies that use derivatives
and/or adversely affect the value of derivatives and the Fund’s performance
Mortgage-Related
and Other Asset-Backed Securities Risk:
the risks
of investing in mortgage-related and other asset-backed securities, including
interest rate risk, extension risk, prepayment risk, and credit
risk
Foreign
(Non-U.S.) Investment Risk:
the risk that investing in foreign (non-U.S.)
securities may result in the Fund experiencing more rapid and extreme
changes in value than a fund that invests exclusively in securities of
U.S.
companies, due to smaller markets, differing reporting, accounting and
auditing
standards, increased risk of delayed settlement of portfolio transactions
or loss of certificates of portfolio securities, and the risk of unfavorable
foreign government actions, including nationalization, expropriation
or confiscatory taxation, currency blockage, or political changes
or diplomatic developments. Foreign securities may also be less liquid
and more difficult to value than securities of U.S.
issuers
Emerging
Markets Risk:
the risk of investing in emerging market securities,
primarily increased foreign (non-U.S.) investment risk
Sovereign
Debt Risk: the
risk that investments in fixed income instruments
issued by sovereign entities may decline in value as a result of
14PROSPECTUS |
PIMCO ETF Trust
default or
other adverse credit event resulting from an issuer’s inability or unwillingness
to make principal or interest payments in a timely
fashion
Leveraging
Risk:
the risk that certain transactions of the Fund, such as reverse
repurchase agreements, loans of portfolio securities, and the use of
when-issued,
delayed delivery or forward commitment transactions, or derivative
instruments, may give rise to leverage, magnifying gains and losses
and causing the Fund to be more volatile than if it had not been leveraged.
This means that leverage entails a heightened risk of
loss
Management
and Tracking Error Risk:
the risk that the portfolio manager’s
investment decisions may not produce the desired results or that the
Fund’s portfolio may not closely track the Underlying Index for a number
of reasons. The Fund incurs operating expenses, which are not applicable
to the Underlying Index, and the costs of buying and selling securities,
especially when rebalancing the Fund’s portfolio to reflect changes
in the composition of the Underlying Index. Performance of the Fund
and the Underlying Index may vary due to asset valuation differences
and
differences between the Fund’s portfolio and the Underlying Index due
to
legal restrictions, cost or liquidity restraints. The risk that performance of
the
Fund and the Underlying Index may vary may be heightened during periods
of increased market volatility or other unusual market conditions. In
addition,
the Fund’s use of a representative sampling approach may cause the
Fund to be less correlated to the return of the Underlying Index than if
the
Fund held all of the securities in the Underlying Index
Indexing
Risk:
the risk that the Fund is negatively affected by general declines
in the asset classes represented by the Underlying
Index
Please
see “Description of Principal Risks” in the Fund’s prospectus for a more
detailed description of the risks of investing in the Fund.
An
investment
in the Fund is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency.
Performance
Information
The
performance information shows summary performance information for the
Fund in a bar chart and an Average Annual Total Returns table. The information
provides some indication of the risks of investing in the Fund by showing
changes in its performance from year to year and by showing how the
Fund’s average annual returns compare with the returns of a broad-based
securities market index. Absent any applicable fee waivers and/or expense
limitations, performance would have been lower. The
Fund’s past performance,
before and after taxes, is not necessarily an indication of how the
Fund will perform in the future.
ICE
BofA 0-5 Year US High Yield Constrained Index tracks the performance
of
short-term U.S. dollar denominated below investment grade corporate debt
issued in the U.S. domestic market with less than five years remaining
term
to final maturity, a fixed coupon schedule and a minimum amount outstanding
of $250 million, issued publicly. Prior to September 30, 2016, securities
with minimum amount outstanding of $100 million qualified. Allocations
to an individual issuer will not exceed 2%. Performance
for the Fund is updated daily and quarterly and may be obtained
as follows: daily and quarterly updates on the net asset value and performance
page at https://www.pimco.com/en-us/investments/etf.
Calendar
Year Total Returns*
.
*The
year-to-date return as of September
30, 2020
is -2.89%.
For the periods shown in the bar
chart, the
highest quarterly return was 5.78% in
the Q1
2019,
and the
lowest quarterly return
was -4.17% in
the Q3
2015.
Average
Annual Total Returns (for periods ended 12/31/2019)
|
|
|
|
|
1
Year |
5
Years |
Since
Inception
(06/16/2011) |
Return
Before Taxes |
9.89% |
4.77% |
5.18% |
Return
After Taxes on Distributions(1)
|
% |
% |
% |
Return
After Taxes on Distributions and Sales of Fund Shares(1)
|
% |
% |
% |
ICE
BofA 0-5 Year US High Yield Constrained Index (reflects
no deductions for fees, expenses or taxes) |
9.90% |
5.31% |
5.69% |
1 |
After-tax
returns are calculated using the highest historical individual federal
marginal income
tax rates and do not reflect the impact of state and local taxes.
Actual
after-tax returns
depend on an investor’s tax situation and may differ from those shown, and
the after-tax
returns shown are not relevant to investors who hold their Fund shares
through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
In
some cases the return after taxes may exceed the return before taxes due
to
an assumed tax benefit from any losses on a sale of Fund shares at the end
of the measurement
period. |
Investment
Adviser/Portfolio Managers
.
.
PIMCO
serves as the investment adviser for
the Fund.
The Fund’s
portfolio is jointly
and primarily managed by Matt Dorsten
and Graham Rennison. Mr. Dorsten
is an Executive Vice President of PIMCO
and Mr. Rennison is a Senior Vice President
of PIMCO. Mr. Dorsten has jointly and primarily managed the Fund
since December
2015. Mr. Rennison has jointly and primarily managed
the Fund since October
2018.
Other
Important Information Regarding Fund
Shares
For
important information about purchase and sale of Fund shares, tax information,
and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary of Other Important Information
Regarding Fund Shares” section on page 19 of
this prospectus.
October
30, 2020 PROSPECTUS15
.
PIMCO
Investment Grade Corporate Bond
Index Exchange-Traded Fund
Investment
Objective
The Fund
seeks to provide total return that closely corresponds, before fees and
expenses, to the total return of ICE BofA US Corporate
Index.
Fees
and Expenses of the Fund
This
table describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund.
You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are
not reflected in the tables and examples below.
Shareholder
Fees (fees paid directly from your investment):
N/A
Annual
Fund
Operating Expenses (expenses that you pay each year
as a percentage of the value of your investment):
|
|
Management
Fees |
0.20% |
Total
Annual Fund Operating Expenses |
0.20% |
Example.
The
Example is intended to help you compare the cost of investing
in the Fund with the costs of investing in other exchange-traded funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated, and then sell all of your shares at the end of those
periods.
The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses remain the same. Investors
may pay brokerage commissions on their purchases and sales of Fund
shares, which are not reflected in the Example. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$20 |
$64 |
$113 |
$255 |
Portfolio
Turnover
The
Fund pays transaction costs when it buys and sells securities (or “turns
over”
its portfolio). A higher portfolio turnover rate may indicate higher
transaction
costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in the Annual
Fund
Operating Expenses or in the Example tables, affect the Fund’s performance.
During the most recent fiscal year, the Fund’s portfolio turnover
rate was 18%
of the average value of its portfolio.
Principal
Investment Strategies
The
Fund seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its total assets (exclusive of collateral
held
from securities lending) in the component securities (“Component Securities”)
of ICE
BofA US Corporate Index (the “Underlying Index”). The Fund
may invest the remainder of its assets in Fixed Income Instruments that
are not Component Securities, but which PIMCO believes will help the
Fund
track its Underlying Index, as well as in cash and investment grade,
liquid
short-term instruments, forwards or derivatives, such as options, futures
contracts or swap agreements, and shares of affiliated bond funds. “Fixed
Income Instruments” include bonds, debt securities and other similar
instruments
issued by various U.S. and non-U.S. public- or private-sector entities.
The Fund may invest in securities rated Baa or higher by Moody’s Investors
Service, Inc. (“Moody’s”), or equivalently rated by Standard &
Poor’s
Ratings Services (“S&P”) or Fitch, Inc. (“Fitch”), or, if unrated,
determined
by PIMCO to be of comparable quality. In the event that ratings services
assign different ratings to the same security, PIMCO will use the highest
rating as the credit rating for that security. The average portfolio
duration
of this Fund will closely correspond to the portfolio duration of the
securities
comprising its Underlying Index, as calculated by PIMCO, which as of
September
30, 2020 was 8.02 years.
Duration is a measure used to determine
the sensitivity of a security’s price to changes in interest rates. The longer
a security’s duration, the more sensitive it will be to changes in interest
rates.
The
Underlying Index is an unmanaged index comprised of U.S. dollar denominated
investment grade corporate debt securities publicly issued in the
U.S. domestic market with at least one year remaining term to final maturity.
As of September
30, 2020, there were 8746
issues in the Underlying
Index. The securities comprising the Underlying Index have an investment
grade rating (based on an average of the ratings of Moody’s, S&P
and Fitch) and an investment grade rated country of risk (based on an
average
of Moody’s, S&P and Fitch foreign currency long term sovereign debt
ratings). In addition, qualifying securities must have a minimum $250
million
of outstanding face value and a fixed coupon schedule. Original issue
zero coupon bonds, debt issued simultaneously in the Eurobond and U.S.
domestic bond markets, 144A securities and corporate pay-in-kind securities
qualify for inclusion in the Underlying Index. Callable perpetual securities
qualify for inclusion in the Underlying Index provided they are at least
one year from the first call date. Fixed-to-floating rate securities also
qualify
provided they are callable within the fixed rate period and are at least
one year from last call prior to the date the bond transitions from a
fixed
to a floating rate security. The Underlying Index is capitalization-weighted
and the composition of Component Securities is updated monthly.
Cash flows from bond payments that are received during the month
are retained in the Underlying Index, without earning reinvestment income,
until removal at the end of the month as part of the rebalancing. It
is
not possible to invest directly in the Underlying Index. The Underlying
Index
does not reflect deductions for fees, expenses or
taxes.
PIMCO
uses an indexing approach in managing the Fund’s investments. The
Fund employs a representative sampling strategy in seeking to achieve
its
investment objective. In using this strategy, PIMCO seeks to invest in a
combination
of Component Securities and other instruments, or in Component
Securities but in different proportions as compared to the weighting
of the Underlying Index, such that the portfolio effectively provides
exposure to the Underlying Index. In using a representative sampling
strategy, the Fund may not track its Underlying Index with the same
degree of accuracy as a fund that replicates the composition and weighting
of the Underlying Index. Unlike many investment companies, the Fund
does not attempt to outperform the index the Fund tracks. An indexing
approach may eliminate the chance that the Fund will substantially
outperform its Underlying Index but also may reduce some of the
risks of active management. Indexing seeks to achieve lower costs by
keeping
portfolio turnover low in comparison to actively managed investment
companies.
The
Fund may invest in derivative instruments, such as options, futures contracts
or swap agreements. The Fund may invest in U.S. dollar-
PIMCO
ETF Trust PROSPECTUS16
denominated
securities of foreign issuers, including securities and instruments
economically tied to emerging market countries. The Fund may purchase
and sell securities on a when-issued, delayed delivery or forward commitment
basis. The Fund may, without limitation, seek to obtain market
exposure to the securities in which it primarily invests by entering
into a
series of purchase and sale contracts or by using other investment techniques
(such as buy backs). The “total return” sought by the Fund consists
of income earned on the Fund’s investments, plus capital appreciation,
if any, which generally arises from decreases in interest
rates.
Principal
Risks
It
is possible to lose money on an investment in the
Fund.
The principal risks of
investing in the Fund, which could adversely affect its net asset value,
yield
and total return, are listed below.
Market
Trading Risk:
the risk that an active secondary trading market for
Fund shares does not continue once developed, that the Fund may not continue
to meet a listing exchange’s trading or listing requirements, or that
Fund shares trade at prices other than the Fund’s net asset
value
Interest
Rate Risk:
the risk that fixed income securities will decline in value
because of an increase in interest rates; a fund with a longer average
portfolio
duration will be more sensitive to changes in interest rates than a fund
with a shorter average portfolio duration
Call
Risk:
the risk that an issuer may exercise its right to redeem a fixed income
security earlier than expected (a call). Issuers may call outstanding
securities
prior to their maturity for a number of reasons (e.g.,
declining interest
rates, changes in credit spreads and improvements in the issuer’s credit
quality). If an issuer calls a security that the Fund has invested in, the
Fund
may not recoup the full amount of its initial investment and may be forced
to reinvest in lower-yielding securities, securities with greater credit
risks
or securities with other, less favorable features
Credit
Risk:
the risk that the Fund could lose money if the issuer or guarantor
of a fixed income security, or the counterparty to a derivative contract,
is unable or unwilling, or is perceived (whether by market participants,
rating agencies, pricing services or otherwise) as unable or unwilling,
to meet its financial obligations
Market
Risk:
the risk that the value of securities owned by the Fund may go
up or down, sometimes rapidly or unpredictably, due to factors affecting
securities
markets generally or particular industries
Liquidity
Risk:
the risk that a particular investment may be difficult to purchase
or sell and that the Fund may be unable to sell illiquid investments
at
an advantageous time or price or achieve its desired level of exposure to
a
certain sector. Liquidity risk may result from the lack of an active market,
reduced
number and capacity of traditional market participants to make a market
in fixed income securities, and may be magnified in a rising interest
rate
environment or other circumstances where investor redemptions from fixed
income funds may be higher than normal, causing increased supply in
the
market due to selling activity
Issuer
Risk:
the risk that the value of a security may decline for a reason directly
related to the issuer, such as management performance, financial leverage
and reduced demand for the issuer’s goods or services
Derivatives
Risk:
the risk of investing in derivative instruments (such as futures,
swaps and structured securities), including leverage, liquidity, interest
rate, market, credit and management risks, and valuation complexity.
Changes in the value of a derivative may not correlate perfectly with,
and may be more sensitive to market events than, the underlying asset,
rate or index, and the Fund could lose more than the initial amount invested.
The Fund’s use of derivatives may result in losses to the Fund, a reduction
in the Fund’s returns and/or increased volatility. Over-the-counter (“OTC”)
derivatives are also subject to the risk that a counterparty to the transaction
will not fulfill its contractual obligations to the other party, as many
of the protections afforded to centrally-cleared derivative transactions
might
not be available for OTC derivatives. The primary credit risk on derivatives
that are exchange-traded or traded through a central clearing counterparty
resides with the Fund’s clearing broker, or the clearinghouse. Changes
in regulation relating to a fund’s use of derivatives and related instruments
could potentially limit or impact the Fund’s ability to invest in derivatives,
limit the Fund’s ability to employ certain strategies that use derivatives
and/or adversely affect the value of derivatives and the Fund’s performance
Foreign
(Non-U.S.) Investment Risk:
the risk that investing in foreign (non-U.S.)
securities may result in the Fund experiencing more rapid and extreme
changes in value than a fund that invests exclusively in securities of
U.S.
companies, due to smaller markets, differing reporting, accounting and
auditing
standards, increased risk of delayed settlement of portfolio transactions
or loss of certificates of portfolio securities, and the risk of unfavorable
foreign government actions, including nationalization, expropriation
or confiscatory taxation, currency blockage, or political changes
or diplomatic developments. Foreign securities may also be less liquid
and more difficult to value than securities of U.S.
issuers
Emerging
Markets Risk:
the risk of investing in emerging market securities,
primarily increased foreign (non-U.S.) investment risk
Sovereign
Debt Risk: the
risk that investments in fixed income instruments
issued by sovereign entities may decline in value as a result of default
or other adverse credit event resulting from an issuer’s inability or
unwillingness
to make principal or interest payments in a timely
fashion
Leveraging
Risk:
the risk that certain transactions of the Fund, such as reverse
repurchase agreements, loans of portfolio securities, and the use of
when-issued,
delayed delivery or forward commitment transactions, or derivative
instruments, may give rise to leverage, magnifying gains and losses
and causing the Fund to be more volatile than if it had not been leveraged.
This means that leverage entails a heightened risk of
loss
Management
and Tracking Error Risk:
the risk that the portfolio manager’s
investment decisions may not produce the desired results or that the
Fund’s portfolio may not closely track the Underlying Index for a number
of reasons. The Fund incurs operating expenses, which are not applicable
to the Underlying Index, and the costs of buying and selling securities,
especially when rebalancing the Fund’s portfolio to reflect changes
in the composition of the Underlying Index. Performance of the Fund
and the Underlying Index may vary due to asset valuation differences
and
differences between the Fund’s portfolio and the Underlying Index due
to
legal restrictions, cost or liquidity restraints. The risk that performance of
the
Fund and the Underlying Index may vary may be heightened during
October
30, 2020 PROSPECTUS17
PIMCO
Investment Grade Corporate Bond Index Exchange-Traded Fund
periods of
increased market volatility or other unusual market conditions. In addition,
the Fund’s use of a representative sampling approach may cause the Fund
to be less correlated to the return of the Underlying Index than if the Fund
held all of the securities in the Underlying Index
Indexing
Risk:
the risk that the Fund is negatively affected by general declines
in the asset classes represented by the Underlying
Index
Please
see “Description of Principal Risks” in the Fund’s prospectus for a more
detailed description of the risks of investing in the Fund.
An
investment
in the Fund is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency.
Performance
Information
The
performance information shows summary performance information for the
Fund in a bar chart and an Average Annual Total Returns table. The information
provides some indication of the risks of investing in the Fund by showing
changes in its performance from year to year and by showing how the
Fund’s average annual returns compare with the returns of a broad-based
securities market index. Absent any applicable fee waivers and/or expense
limitations, performance would have been lower. The
Fund’s past performance,
before and after taxes, is not necessarily an indication of how the
Fund will perform in the
future.
ICE
BofA US Corporate Index is an unmanaged index comprised of U.S.
dollar
denominated investment grade, fixed rate corporate debt securities publicly
issued in the U.S. domestic market with at least one year remaining term
to final maturity and at least $250 million outstanding. Performance
for
the Fund is updated daily and quarterly and may be obtained as follows:
daily
and quarterly updates on the net asset value and performance page at
https://www.pimco.com/en-us/investments/etf.
Calendar
Year Total Returns*
.
*The
year-to-date return as of September
30, 2020
is 6.75%.
For the periods shown in the bar
chart, the
highest quarterly return was 5.33% in
the Q1
2019,
and the
lowest quarterly return
was -3.70% in
the Q2
2013.
Average
Annual Total Returns (for periods ended 12/31/2019)
|
|
|
|
|
1
Year |
5
Years |
Since
Inception
(09/20/2010) |
Return
Before Taxes |
14.45% |
4.59% |
4.84% |
Return
After Taxes on Distributions(1)
|
% |
% |
% |
Return
After Taxes on Distributions and Sales of Fund Shares(1)
|
% |
% |
% |
ICE
BofA US Corporate Index (reflects no deductions for
fees, expenses or taxes) |
14.23% |
4.60% |
4.95% |
1 |
After-tax
returns are calculated using the highest historical individual federal
marginal income
tax rates and do not reflect the impact of state and local taxes.
Actual
after-tax returns
depend on an investor’s tax situation and may differ from those shown, and
the after-tax
returns shown are not relevant to investors who hold their Fund shares
through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
In
some cases the return after taxes may exceed the return before taxes due
to
an assumed tax benefit from any losses on a sale of Fund shares at the end
of the measurement
period. |
Investment
Adviser/Portfolio Managers
.
.
PIMCO
serves as the investment adviser for
the Fund.
The Fund’s
portfolio is jointly
and primarily managed by Matt Dorsten
and Graham Rennison. Mr. Dorsten
is an Executive Vice President of PIMCO
and Mr. Rennison is a Senior Vice President
of PIMCO. Mr. Dorsten has jointly and primarily managed the Fund
since December
2015. Mr. Rennison has jointly and primarily managed
the Fund since October
2018.
Other
Important Information Regarding Fund
Shares
For
important information about purchase and sale of Fund shares, tax information,
and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary of Other Important Information
Regarding Fund Shares” section on page 19 of
this prospectus.
18PROSPECTUS |
PIMCO ETF Trust
Summary
of Other Important Information Regarding Fund Shares
Purchase
and Sale of Fund Shares
Each
Fund is an exchange-traded fund (“ETF”). Individual Fund shares may only
be purchased and sold on a national securities exchange through a broker-dealer
and may not be purchased or redeemed directly with a Fund. The
price of Fund shares is based on market price, and because ETF shares
trade
at market prices rather than net asset value (“NAV”), shares may trade
at a price greater than NAV (a premium) or less than NAV (a discount).
An investor may incur costs attributable to the difference between
the highest price a buyer is willing to pay to purchase shares of a Fund
(“bid”) and the lowest price a seller is willing to accept for shares
(“ask”)
when buying or selling shares in the secondary market (the “bid-ask
spread”). Recent information, including information about each Fund’s
NAV,
market price, premiums and discounts, and bid-ask spreads, is included
on the Fund’s website at https://www.pimco.com/en-us/investments/etf.
Tax
Information
The
Funds’ distributions are generally taxable to you as ordinary income,
capital
gains, or a combination of the two, unless you are investing through
a
tax-deferred arrangement, such as a 401(k) plan or an individual retirement
account, in which case distributions may be taxable upon withdrawal.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase Fund shares through a broker-dealer or other financial intermediary,
PIMCO or other related companies may pay the intermediary for
the sale of Fund shares or related services. These payments may create a
conflict
of interest by influencing the broker-dealer or other intermediary and
your salesperson to recommend the Fund over another investment. Ask your
salesperson or visit your financial intermediary’s website for more information.
Summary
Information About the Funds
This
prospectus describes six ETFs (each a “Fund,” collectively the “Funds”)
offered
by PIMCO ETF Trust (the “Trust”). The Funds provide access to the professional
investment advisory services offered by PIMCO. References to “the
Fund” or “a Fund” relate to all Funds unless the context requires otherwise.
ETFs
are funds that trade like other publicly-traded securities and may be
designed
to track an index or to be actively managed. Similar to shares of an
index mutual fund, each share of the Fund represents a partial ownership
of the fund which owns an underlying portfolio of securities intended
to track an index. Unlike shares of a mutual fund, which can be bought
from and redeemed by the issuing fund by all shareholders at a price
based on NAV, shares of a Fund may be directly purchased from and redeemed
by the Fund at NAV solely by a member or participant of a clearing
agency registered with the Securities and Exchange Commission, which
has a written agreement with the Fund’s Distributor that allows such
member
or participant to place orders for the purchase and redemption of Creation
Units (as defined below) (“Authorized Participant”). Also unlike shares
of a mutual fund, shares of ETFs are listed on a national securities
exchange
and trade in the secondary market at market prices that change throughout
the day.
Shares
of a Fund are listed and traded at market prices on NYSE Arca, Inc. (“NYSE
Arca”) and other secondary markets. The market price for a Fund’s shares
may be different from the Fund’s NAV. The Funds issue and redeem shares
at NAV only in aggregations of a specified number of shares (“Creation
Units”). Only Authorized Participants may purchase or redeem Creation
Units directly with the Fund at NAV. These transactions are in exchange
for securities and/or cash. Except when aggregated in Creation Units,
shares of a Fund are not redeemable securities. Shareholders who are
not Authorized Participants may not purchase or redeem shares directly
from
a Fund.
If
a Fund were to effect redemptions with an Authorized Participant primarily
for cash, the Fund may be required to sell portfolio securities in order
to obtain the cash needed to distribute redemption proceeds. The sale
of portfolio securities could cause a Fund to recognize gains that it
might
not otherwise have recognized if redemptions were effected in-kind, or
to recognize such gain sooner than would otherwise be required. Such
gains
will generally be distributed to shareholders to avoid taxation at the
Fund
level and to ensure compliance with other special tax rules that apply
to
the Funds. Moreover, the sale of portfolio securities will generally subject
the
Funds to transaction costs, which may be partially or totally offset by
the
variable transaction fee charged by the Funds to redeeming Authorized
Participants.
A
Fund invests in a particular segment of the securities markets and seeks
to
track the performance of an index that is not representative of the broader
securities markets. An investment in a particular Fund alone should not
constitute an entire investment program. This prospectus explains what
you
should know about the Funds before you invest. Please read it carefully.
Certain affiliates of the Funds and PIMCO may purchase and resell Fund
shares pursuant to this prospectus.
Fund
fact sheets provide additional information regarding the Funds and may
be requested by calling 1.888.400.4ETF (1.888.400.4383).
PIMCO
ETF Trust PROSPECTUS19
Description
of Principal Risks
The
value of your investment in a Fund changes with the market price of the
Fund’s shares determined in the secondary market. Market price may be
determined, in part, by the values of a Fund’s investments. Many factors
can
affect those values. The factors that are most likely to have a material
effect
on a particular Fund’s portfolio as a whole are called “principal risks.”
The principal risks of each Fund are identified in the Fund Summaries.
The principal risks are described in more detail in this section. Each
Fund may be subject to additional risks other than those identified
and
described below because the types of investments made by a Fund can change
over time. Securities and investment techniques mentioned in this summary
that appear in bold
type
are described in greater detail under “Characteristics
and Risks of Securities and Investment Techniques.” That section
and “Investment Objectives and Policies” in the Statement of Additional
Information (the “SAI”) also include more information about the Funds,
their investments and the related risks. There is no guarantee that a
Fund
will be able to achieve its investment objective. It is possible to lose
money
by investing in a Fund.
Small
Fund Risk
A
smaller fund may not grow to or maintain an economically viable size to
achieve
investment or trading efficiencies, which may negatively impact performance
and/or force the fund to liquidate. Additionally, a smaller fund may
be more adversely affected by large purchases or redemptions of fund
shares,
which can occur at any time and may impact the fund in the same manner
as a high volume of purchases or redemptions.
Market
Trading Risk
Each
Fund is subject to secondary market trading risks. Shares of a Fund
are
listed for trading on an exchange, however, there can be no guarantee
that
an active trading market for such shares will develop or continue. Shares
of a Fund may be listed or traded on U.S. and foreign (non-U.S.) exchanges
other than the Fund’s primary U.S. listing exchange. There can be
no guarantee that a Fund’s shares will continue trading on any exchange
or in any market or that a Fund’s shares will continue to meet the
listing
or trading requirements of any exchange or market. A Fund’s shares may
experience higher trading volumes on one exchange as compared to another
and investors are subject to the execution and settlement risks of the
market where their broker directs trades.
Secondary
market trading in a Fund’s shares may be halted by an exchange because
of market conditions. Pursuant to exchange or market rules, trading
in a Fund’s shares on an exchange or in any market may be subject to
trading halts caused by extraordinary market volatility. If secondary
market
trading is halted or an exchange closes earlier than anticipated, you
may
be unable to purchase or sell Fund shares. There can be no guarantee
that
a Fund’s exchange listing or ability to trade its shares will continue or
remain
unchanged. In the event a Fund ceases to be listed on an exchange, the
Fund may cease operating as an “exchange-traded” fund and operate as
a mutual fund, provided that shareholders are given advance notice.
Buying
or selling a Fund’s shares on an exchange may require the payment of
brokerage commissions. In addition, an investor who buys or sells may
also
incur the cost of the spread (the difference between the bid price and
the
ask price). The commission is frequently a fixed amount and may be a
significant
cost for investors seeking to buy or sell small amounts of shares. The spread
varies over time for shares of a Fund based on their trading volume and
market liquidity, and is generally less if the Fund has more trading
volume and market liquidity and more if the Fund has less trading volume and
market liquidity. Due to the costs inherent in buying or selling a Fund’s
shares, frequent trading may detract significantly from investment returns.
Investment in a Fund’s shares may not be advisable for investors who expect
to engage in frequent trading.
Shares
of a Fund may trade on an exchange at prices at, above or below their
most recent NAV, which could result in an investor buying shares of
the
Fund at a higher price than the Fund’s NAV or selling shares of the Fund
at a lower price than the Fund’s NAV. The market prices of Fund shares
will fluctuate, sometimes rapidly and materially, in response to changes
in the Fund’s NAV, the value of Fund holdings and supply and demand
for Fund shares. Although the creation/redemption feature of the Funds
generally makes it more likely that Fund shares will trade close to NAV,
market volatility, lack of an active trading market for Fund shares,
disruptions
at market participants (such as Authorized Participants or market
makers) and any disruptions in the ordinary functioning of the creation/redemption
process may result in Fund shares trading significantly above
(at a “premium”) or below (at a “discount”) NAV. Additionally, to the
extent a Fund holds securities traded in markets that close at a different
time
from the Fund’s listing exchange, liquidity in such securities may be
reduced
after the applicable closing times, and during the time when the Fund’s
listing exchange is open but after the applicable market closing, fixing
or settlement times, bid/ask spreads and the resulting premium or discount
to the Fund’s shares’ NAV may widen. You may be unable to sell your
shares or may incur significant losses if you transact in Fund shares in
these
and other circumstances. Neither PIMCO nor the Trust can predict whether
Fund shares will trade above, below or at NAV. A Fund’s investment
results are based on the Fund’s daily NAV. Investors transacting in
Fund shares in the secondary market, where market prices may differ from
NAV, may experience investment results that differ from results based
on
the Fund’s daily NAV. There are various methods by which investors can
purchase
and sell shares and various orders that may be placed. Investors should
consult their financial intermediary before purchasing or selling shares
of the Funds.
A
Fund has a limited number of intermediaries that act as Authorized Participants,
and none of these Authorized Participants are or will be obligated
to engage in creation or redemption transactions. To the extent that
these intermediaries exit the business or are unable to or choose not to
proceed
with creation and/or redemption orders with respect to a Fund and no
other Authorized Participant is able and willing to create or redeem,
shares
may trade at a discount to NAV and possibly face trading halts and/or
delisting. Additionally, while Fund shares are listed for trading on an
exchange,
there can be no assurance that active trading markets for Fund shares
will be maintained by market makers or Authorized Participants. Decisions
by market makers or Authorized Participants to reduce their role or
“step away” from these activities in times of market stress may inhibit
the
effectiveness of the creation/redemption process in maintaining the relationship
between the underlying value of a Fund’s holdings and the Fund’s
NAV. Such reduced effectiveness could result in the Fund’s shares
20PROSPECTUS |
PIMCO ETF Trust
trading at
a discount to its NAV and also in greater than normal intraday bid/ask
spreads for the Fund’s shares.
Interest
Rate Risk
Interest
rate risk is the risk that fixed income securities and other instruments
in a Fund’s portfolio will decline in value because of an increase
in interest rates. As nominal interest rates rise, the value of certain
fixed
income securities held by a Fund is likely to decrease. A nominal interest
rate can be described as the sum of a real interest rate and an expected
inflation rate. Interest rate changes can be sudden and unpredictable,
and a Fund may lose money as a result of movements in interest
rates. A Fund may not be able to hedge against changes in interest rates
or may choose not to do so for cost or other reasons. In addition, any
hedges
may not work as intended.
Fixed
income securities with longer durations tend to be more sensitive to
changes
in interest rates, usually making them more volatile than securities
with
shorter durations. The values of equity and other non-fixed income securities
may also decline due to fluctuations in interest rates. Inflation-indexed
bonds,
including Treasury Inflation-Protected Securities (“TIPS”), decline
in value when real interest rates rise. In certain interest rate environments,
such as when real interest rates are rising faster than nominal
interest rates, inflation-indexed
bonds
may experience greater losses
than other fixed income securities with similar durations.
Variable
and floating rate securities
generally are less sensitive to interest
rate changes but may decline in value if their interest rates do not
rise
as much, or as quickly, as interest rates in general. Conversely, floating
rate
securities will not generally increase in value if interest rates decline.
Inverse
floating rate securities may decrease in value if interest rates increase.
Inverse floating rate securities may also exhibit greater price volatility
than a fixed rate obligation with similar credit quality. When a Fund
holds variable or floating rate securities, a decrease (or, in the case of
inverse
floating rate securities, an increase) in market interest rates will
adversely
affect the income received from such securities and the NAV of the
Fund’s shares.
A
wide variety of factors can cause interest rates or yields of U.S. Treasury
securities
(or yields of other types of bonds) to rise (e.g.,
central bank monetary
policies, inflation rates, general economic conditions, etc.). This is
especially
true under current conditions because interest rates and bond yields
are at or near historically low levels. Thus, Funds currently face a
heightened
level of risk associated with rising interest rates and/or bond yields.
This could be driven by a variety of factors, including but not limited
to
central bank monetary policies, changing inflation or real growth rates,
general
economic conditions, increasing bond issuances or reduced market demand
for low yielding investments.
During
periods of very low or negative interest rates, a Fund may be unable
to
maintain positive returns. Interest rates in the U.S. and many parts of the
world,
including certain European countries, are at or near historically low
levels.
Certain European countries have recently experienced negative interest
rates on certain fixed
income instruments.
Very low or negative interest
rates may magnify interest rate risk. Changing interest rates, including
rates that fall below zero, may have unpredictable effects on
markets,
may result in heightened market volatility and may detract from Fund
performance to the extent a Fund is exposed to such interest rates.
Measures
such as average duration
may not accurately reflect the true interest
rate sensitivity of a Fund. This is especially the case if a Fund consists
of securities with widely varying durations.
Therefore, if a Fund has
an average duration
that suggests a certain level of interest rate risk, the
Fund may in fact be subject to greater interest rate risk than the average
would suggest. This risk is greater to the extent the Fund uses leverage
or derivatives
in connection with the management of the Fund.
Convexity
is an additional measure used to understand a security’s or Fund’s
interest rate sensitivity. Convexity measures the rate of change of duration
in response to changes in interest rates. With respect to a security’s
price, a larger convexity (positive or negative) may imply more dramatic
price changes in response to changing interest rates. Convexity may
be positive or negative. Negative convexity implies that interest rate
increases
result in increased duration,
meaning increased sensitivity in prices
in response to rising interest rates. Thus, securities with negative
convexity,
which may include bonds with traditional call features and certain
mortgage-backed securities, may experience greater losses in periods
of rising interest rates. Accordingly, if a Fund holds such securities,
the
Fund may be subject to a greater risk of losses in periods of rising
interest
rates.
Call
Risk
Call
risk refers to the possibility that an issuer may exercise its right to
redeem
a fixed income security earlier than expected (a call). Issuers may call
outstanding securities prior to their maturity for a number of reasons
(e.g.,
declining interest rates, changes in credit spreads and improvements
in
the issuer’s credit quality). If an issuer calls a security in which a Fund has
invested,
the Fund may not recoup the full amount of its initial investment and
may be forced to reinvest in lower-yielding securities, securities with
greater
credit risks or securities with other, less favorable features.
Inflation-Indexed
Security Risk
Inflation-indexed
debt securities are subject to the effects of changes in market
interest rates caused by factors other than inflation (real interest
rates).
In general, the value of an inflation-indexed security, including TIPS,
tends
to decrease when real interest rates increase and can increase when real
interest rates decrease. Thus generally, during periods of rising inflation,
the value of inflation-indexed securities will tend to increase and during
periods of deflation, their value will tend to decrease. Interest payments
on inflation-indexed securities are unpredictable and will fluctuate
as the principal and interest are adjusted for inflation. There can be
no assurance that the inflation index used (i.e.,
the CPI), which is calculated
and published by a third party, will accurately measure the real rate
of inflation in the prices of goods and services. Increases in the principal
value of TIPS due to inflation are considered taxable ordinary income
for the amount of the increase in the calendar year. Any increase in
the
principal amount of an inflation-indexed debt security will be considered
taxable ordinary income, even though the Fund will not receive the
principal until maturity. Additionally, a CPI swap can potentially lose
value
if the realized rate of inflation over the life of the swap is less than the
fixed
market implied inflation rate (fixed breakeven rate) that the investor
October
30, 2020 PROSPECTUS21
agrees to
pay at the initiation of the swap. With municipal inflation-indexed securities,
the inflation adjustment is integrated into the coupon payment, which is
federally tax exempt (and may be state tax exempt). For municipal inflation-indexed
securities, there is no adjustment to the principal value. Because
municipal inflation-indexed securities are a small component of the municipal
bond market, they may be less liquid than conventional municipal
bonds.
Credit
Risk
A
Fund could lose money if the issuer or guarantor of a fixed income security
(including a security purchased with securities lending collateral), or
the
counterparty to a derivatives
contract, repurchase
agreement
or a loan
of portfolio securities,
is unable or unwilling, or is perceived (whether
by market participants, rating agencies, pricing services or otherwise)
as unable or unwilling, to make timely principal and/or interest payments,
or to otherwise honor its obligations. The downgrade of the credit
of a security held by a Fund may decrease its value. Securities are subject
to varying degrees of credit risk, which are often reflected in credit
ratings.
Measures such as average credit quality may not accurately reflect the
true credit risk of a Fund. This is especially the case if a Fund consists of
securities
with widely varying credit
ratings.
Therefore, if a Fund has an average
credit
rating
that suggests a certain credit quality, the Fund may in
fact be subject to greater credit risk than the average would suggest. This
risk
is greater to the extent the Fund uses leverage or derivatives in connection
with the management of the Fund. Municipal bonds are subject to
the risk that litigation, legislation or other political events, local business
or
economic conditions, or the bankruptcy of the issuer could have a significant
effect on an issuer’s ability to make payments of principal and/or interest.
High
Yield Risk
Funds
that invest in high
yield securities and unrated securities
of similar
credit quality (commonly known as “high yield securities” or “junk bonds”)
may be subject to greater levels of credit risk, call risk and liquidity
risk
than funds that do not invest in such securities. These securities are
considered
predominantly speculative with respect to an issuer’s continuing ability
to make principal and interest payments, and may be more volatile than
other types of securities. An economic downturn or individual corporate
developments could adversely affect the market for these securities
and reduce a Fund’s ability to sell these securities at an advantageous
time or price. An economic downturn would generally lead to
a higher non-payment rate and, a high
yield security
may lose significant
market value before a default occurs. High
yield securities
structured
as zero-coupon bonds or pay-in-kind securities tend to be especially
volatile as they are particularly sensitive to downward pricing pressures
from rising interest rates or widening spreads and may require a Fund
to make taxable distributions of imputed income without receiving the
actual
cash currency. Issuers of high
yield securities
may have the right to
“call” or redeem the issue prior to maturity, which may result in a Fund
having
to reinvest the proceeds in other high
yield securities
or similar instruments
that may pay lower interest rates. A Fund may also be subject to
greater levels of liquidity risk than funds that do not invest in high
yield securities.
In addition, the high
yield securities
in which a Fund invests may
not be listed on any exchange and a secondary market for such
securities
may be comparatively illiquid relative to markets for other more liquid
fixed income securities. Consequently, transactions in high
yield securities may
involve greater costs than transactions in more actively traded
securities. A lack of publicly-available information, irregular trading
activity
and wide bid/ask spreads among other factors, may, in certain circumstances,
make high yield debt more difficult to sell at an advantageous
time or price than other types of securities or instruments. These
factors may result in a Fund being unable to realize full value for these
securities and/or may result in a Fund not receiving the proceeds from
a sale of
a high
yield security for an
extended period after such sale, each of
which could result in losses to a Fund. Because of the risks involved
in
investing in high
yield securities, an
investment in a Fund that invests in such
securities should be considered speculative.
Market
Risk
The
market price of securities owned by a Fund may go up or down, sometimes
rapidly or unpredictably. Securities may decline in value due to factors
affecting securities markets generally or particular industries represented
in the securities markets. The value of a security may decline due
to general market conditions that are not specifically related to a particular
company, such as real or perceived adverse economic conditions, changes
in the general outlook for corporate earnings, changes in interest or
currency rates, adverse changes to credit markets or adverse investor
sentiment
generally. The value of a security may also decline due to factors that
affect a particular industry or industries, such as labor shortages or
increased production costs and competitive conditions within an industry.
During a general downturn in the securities markets, multiple asset
classes may decline in value simultaneously. Equity
securities
generally
have greater price volatility than fixed income securities. Credit ratings
downgrades may also negatively affect securities held by the Fund. Even
when markets perform well, there is no assurance that the investments
held by a Fund will increase in value along with the broader market.
In
addition, market risk includes the risk that geopolitical and other events
will
disrupt the economy on a national or global level. For instance, war,
terrorism,
market manipulation, government defaults, government shutdowns,
political changes or diplomatic developments, public health emergencies
(such as the spread of infectious diseases, pandemics and epidemics)
and natural/environmental disasters can all negatively impact the
securities markets, which could cause the Funds to lose value. These
events
could reduce consumer demand or economic output, result in market
closures, travel restrictions or quarantines, and significantly adversely
impact the economy. The current contentious domestic political environment,
as well as political and diplomatic events within the United States
and abroad, such as presidential elections in the U.S. or abroad or the
U.S. government’s inability at times to agree on a long-term budget and
deficit reduction plan, has in the past resulted, and may in the future
result,
in a government shutdown or otherwise adversely affect the U.S. regulatory
landscape, the general market environment and/or investor sentiment,
which could have an adverse impact on a Fund’s investments and
operations. Additional and/or prolonged U.S. federal government shutdowns
may affect investor and consumer confidence and may adversely
impact financial markets and the broader economy, perhaps
22PROSPECTUS |
PIMCO ETF Trust
suddenly
and to a significant degree. Governmental and quasi-governmental
authorities and regulators throughout the world have previously
responded to serious economic disruptions with a variety of significant
fiscal and monetary policy changes, including but not limited to, direct
capital infusions into companies, new monetary programs and dramatically
lower interest rates. An unexpected or sudden reversal of these policies,
or the ineffectiveness of these policies, could increase volatility in
securities
markets, which could adversely affect a Fund’s investments. Any market
disruptions could also prevent a Fund from executing advantageous investment
decisions in a timely manner. Funds that have focused their investments
in a region enduring geopolitical market disruption will face higher
risks of loss, although the increasing interconnectivity between global
economies and financial markets can lead to events or conditions in one
country, region or financial market adversely impacting a different country,
region or financial market. Thus, investors should closely monitor current
market conditions to determine whether a specific Fund meets their individual
financial needs and tolerance for risk.
Current
market conditions may pose heightened risks with respect to Funds that
invest in fixed income securities. As discussed more under “Interest
Rate
Risk,” interest rates in the U.S. are at or near historically low levels.
Any
interest rate increases in the future could cause the value of any Fund
that
invests in fixed income securities to decrease. As such, fixed income
securities
markets may experience heightened levels of interest rate, volatility
and liquidity risk. If rising interest rates cause a Fund to lose enough
value, the Fund could also face increased shareholder redemptions, which
could force the Fund to liquidate investments at disadvantageous times
or prices, therefore adversely affecting the Fund and its
shareholders.
Exchanges
and securities markets may close early, close late or issue trading
halts on specific securities or generally, which may result in, among
other
things, a Fund being unable to buy or sell certain securities or financial
instruments at an advantageous time or accurately price its portfolio
investments. In addition, a Fund may rely on various third- party sources
to calculate its NAV. As a result, a Fund is subject to certain operational
risks associated with reliance on service providers and service providers’
data sources. In particular, errors or systems failures and other technological
issues may adversely impact a Fund’s calculations of its NAV, and
such NAV calculation issues may result in inaccurately calculated NAVs,
delays
in NAV calculation and/or the inability to calculate NAVs over extended
periods. A Fund may be unable to recover any losses associated with
such failures.
Liquidity
Risk
The
Securities and Exchange Commission defines liquidity risk as the risk
that
a Fund could not meet requests to redeem shares issued by the Fund without
significant dilution of remaining investors’ interests in the Fund. Liquidity
risk exists when particular investments are difficult to purchase or
sell.
Illiquid
investments are investments that the Fund reasonably expects cannot
be sold or disposed of in current market conditions in seven calendar
days or less without the sale or disposition significantly changing the
market value of the investment. Illiquid
investments
may become harder
to value, especially in changing markets. A Fund’s investments in illiquid investments
may reduce the returns of the Fund because it may be
unable to sell the illiquid investments
at an advantageous time or
price or
possibly require a Fund to dispose of other investments at unfavorable
times or prices in order to satisfy its obligations, which could prevent
the Fund from taking advantage of other investment opportunities. Additionally,
the market for certain investments may become illiquid under adverse
market or economic conditions independent of any specific adverse changes in
the conditions of a particular issuer. Bond markets have consistently
grown over the past three decades while the capacity for traditional
dealer counterparties to engage in fixed income trading has not kept pace
and in some cases has decreased. As a result, dealer inventories of
corporate bonds, which provide a core indication of the ability of financial
intermediaries to “make markets,” are at or near historic lows in relation
to market size. Because market makers seek to provide stability to a market
through their intermediary services, the significant reduction in dealer
inventories could potentially lead to decreased liquidity and increased
volatility in the fixed income markets. Such issues may be exacerbated
during periods of economic uncertainty.
In
such cases, a Fund, due to regulatory limitations on investments in illiquid investments
and the difficulty in purchasing and selling such securities
or instruments, may be unable to achieve its desired level of exposure
to a certain sector. To the extent that a Fund’s principal investment
strategies involve securities of companies with smaller market capitalizations,
foreign (non-U.S.) securities, Rule 144A securities, illiquid sectors
of fixed income securities, derivatives or securities with substantial market
and/or credit risk, the Fund will tend to have the greatest
exposure to liquidity risk. Further, fixed income securities with longer
durations until maturity face heightened levels of liquidity risk as
compared
to fixed income securities with shorter durations until maturity. Finally,
liquidity risk also refers to the risk of unusually high redemption requests,
redemption requests by certain large shareholders such as institutional
investors or asset allocators, or other unusual market conditions
that may make it difficult for a Fund to sell investments within the
allowable time period to meet redemptions. Meeting such redemption requests
could require a Fund to sell securities at reduced prices or under unfavorable
conditions, which would reduce the value of the Fund. It may also
be the case that other market participants may be attempting to liquidate
fixed income holdings at the same time as a Fund, causing increased
supply in the market and contributing to liquidity risk and downward
pricing pressure.
Certain
accounts or PIMCO affiliates may from time to time own (beneficially
or of record) or control a significant percentage of a Fund’s shares.
Redemptions by these shareholders of their holdings in a Fund may impact
the Fund’s liquidity and NAV. These redemptions may also force a Fund
to sell securities, which may negatively impact the Fund’s brokerage
costs.
Issuer
Risk
The
value of a security may decline for a number of reasons that directly
relate
to the issuer, such as management performance, financial leverage and
reduced demand for the issuer’s goods or services, as well as the historical
and prospective earnings of the issuer and the value of its assets. A
change in the financial condition of a single issuer may affect securities
markets
as a whole.
October
30, 2020 PROSPECTUS23
Derivatives
Risk
Derivatives
are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. The various
derivative
instruments that the Funds may use are referenced under “Characteristics
and Risks of Securities and Investment Techniques—Derivatives”
in this prospectus and described in more detail under
“Investment Objectives and Policies” in the SAI. The Funds typically
use derivatives
as a substitute for taking a position in the underlying asset,
as part of strategies designed to gain exposure to, for example, issuers,
portions of the yield curve, indexes, sectors, currencies, and/or geographic
regions, and/or to reduce exposure to other risks, such as interest
rate, credit, or currency risk. The Funds may also use derivatives
for
leverage, in which case their use would involve leveraging risk, and in
some
cases, may subject a Fund to the potential for unlimited loss. The use
of
derivatives
may cause the Fund’s investment returns to be impacted by the
performance of securities the Fund does not own and result in the Fund’s
total investment exposure exceeding the value of its portfolio.
A
Fund’s use of derivative
instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities
and other traditional investments. Derivatives
are subject to a number
of risks described elsewhere in this section, such as liquidity risk
(which
may be heightened for highly-customized derivatives),
interest rate
risk, market risk, credit risk and management risk, as well as risks
arising
from changes in applicable requirements. They also involve the risk
of improper
valuation and the risk that changes in the value of a derivative
instrument may not correlate perfectly with the underlying asset,
rate or index. By investing in a derivative
instrument, the Fund could
lose more than the initial amount invested and derivatives
may increase
the volatility of the Fund, especially in unusual or extreme market conditions.
Also, suitable derivative
transactions may not be available in all
circumstances and there can be no assurance that a Fund will engage in
these
transactions to reduce exposure to other risks when that would be beneficial
or that, if used, such strategies will be successful. In addition, a
Fund’s
use of derivatives
may increase or accelerate the amount of taxes payable
by shareholders. Over-the-counter (“OTC”) derivatives
are also subject
to the risk that a counterparty to the transaction will not fulfill its
contractual
obligations to the other party, as many of the protections afforded
to centrally-cleared derivative
transactions might not be available
for OTC derivatives.
The primary credit risk on derivatives that are
exchange-traded or traded through a central clearing counterparty resides
with the Fund’s clearing broker, or the clearinghouse.
Participation
in the markets for derivative
instruments involves investment risks
and transaction costs to which a Fund may not be subject absent the use
of these strategies. The skills needed to successfully execute derivative
strategies may be different from those needed for other types of
transactions. If the Fund incorrectly forecasts the value and/or creditworthiness
of securities, currencies, interest rates, counterparties or other
economic factors involved in a derivative
transaction, the Fund might
have been in a better position if the Fund had not entered into such
derivative
transaction. In evaluating the risks and contractual obligations associated
with particular derivative
instruments, it is important to consider
that certain derivative
transactions may be modified or
terminated
only by mutual consent of the Fund and its counterparty. Therefore,
it may not be possible for the Fund to modify, terminate, or offset the
Fund’s obligations or the Fund’s exposure to the risks associated with a
derivative
transaction prior to its scheduled termination or maturity date,
which may create a possibility of increased volatility and/or decreased
liquidity
to the Fund. In such case, the Fund may lose money.
Because
the markets for certain derivative
instruments (including markets located
in foreign countries) are relatively new and still developing, appropriate
derivative
transactions may not be available in all circumstances
for risk management or other purposes. Upon the expiration of
a particular contract, a Fund may wish to retain its position in the
derivative
instrument by entering into a similar contract, but may be unable
to do so if the counterparty to the original contract is unwilling to
enter
into the new contract and no other appropriate counterparty can be found.
When such markets are unavailable, a Fund will be subject to increased
liquidity and investment risk.
When
a derivative
is used as a hedge against a position that a Fund holds,
any loss generated by the derivative
generally should be substantially
offset by gains on the hedged investment, and vice versa. Although
hedging can reduce or eliminate losses, it can also reduce or eliminate
gains. Hedges are sometimes subject to imperfect matching between
the derivative
and the underlying instrument, and there can be no
assurance that a Fund’s hedging transactions will be effective.
The
regulation of the derivatives
markets has increased over the past several
years, and additional future regulation of the derivatives
markets may
make derivatives
more costly, may limit the availability or reduce the liquidity
of derivatives,
or may otherwise adversely affect the value or performance
of derivatives.
Any such adverse future developments could impair
the effectiveness or raise the costs of a Fund’s derivative
transactions,
impede the employment of the Fund’s derivatives strategies, or
adversely affect the Fund’s performance.
Mortgage-Related
and Other Asset-Backed Securities Risk
Mortgage-related
and other asset-backed securities
represent interests
in “pools” of mortgages or other assets such as consumer loans or receivables
held in trust and often involve risks that are different from or possibly
more acute than risks associated with other types of debt instruments.
Generally, rising interest rates tend to extend the duration of fixed
rate mortgage-related securities, making them more sensitive to changes
in interest rates. As a result, in a period of rising interest rates, if a
Fund
holds mortgage-related securities, it may exhibit additional volatility
since
individual mortgage holders are less likely to exercise prepayment options,
thereby putting additional downward pressure on the value of these
securities and potentially causing the Fund to lose money. This is known
as extension risk. Mortgage-backed securities can be highly sensitive
to rising interest rates, such that even small movements can cause an
investing Fund to lose value. Mortgage-backed securities, and in
particular
those not backed by a government guarantee, are subject to credit
risk. In addition, adjustable and fixed rate mortgage-related securities
are
subject to prepayment risk. When interest rates decline, borrowers may
pay
off their mortgages sooner than expected. This can reduce the returns
of a
Fund because the Fund may have to reinvest that money at the lower
24PROSPECTUS |
PIMCO ETF Trust
prevailing
interest rates. A Fund’s investments in other asset-backed securities
are subject to risks similar to those associated with mortgage-related
securities, as well as additional risks associated with the nature of
the assets
and the servicing of those assets. Payment of principal and interest
on asset-backed securities may be largely dependent upon the cash flows
generated by the assets backing the securities, and asset-backed securities
may not have the benefit of any security interest in the related assets.
Foreign
(Non-U.S.) Investment Risk
Certain
Funds may invest in foreign
(non-U.S.) securities and
may experience
more rapid and extreme changes in value than a Fund that invests
exclusively in securities of U.S. issuers or securities that trade exclusively
in U.S. markets. The securities markets of many foreign (non-U.S.)
countries are relatively small, with a limited number of companies representing
a small number of industries. Additionally, issuers of foreign
(non-U.S.) securities
are usually not subject to the same degree of regulation
as U.S. issuers. Reporting, accounting and auditing standards of foreign
countries differ, in some cases significantly, from U.S. standards. Global
economies and financial markets are becoming increasingly
interconnected, and conditions and events in one country, region
or financial market may adversely impact issuers in a different country,
region or financial market. Also, nationalization, expropriation or confiscatory
taxation, currency blockage, market disruptions, political changes,
security suspensions or diplomatic developments could adversely affect
a Fund’s investments in a foreign country. In the event of nationalization,
expropriation or other confiscation, a Fund could lose its entire
investment in foreign
(non-U.S.) securities.
Adverse conditions in a
certain region can adversely affect securities of other countries whose
economies
appear to be unrelated. To the extent that a Fund invests a significant
portion of its assets in a specific geographic region, or in securities
denominated in a particular foreign (non-U.S.) currency, the Fund will
generally have more exposure to regional economic risks including weather
emergencies and natural disasters, associated with foreign (non-U.S.)
investments. Foreign (non-U.S.)
securities may
also be less liquid and
more difficult to value than securities of U.S. issuers.
Emerging
Markets Risk
Foreign
(non-U.S.) investment risk may be particularly high to the extent a
Fund
invests in emerging
market securities.
Emerging
market securities
may present market, credit, currency, liquidity, legal, political, technical and
other risks different from, and potentially greater than, the risks
of investing in securities and instruments economically tied to developed
foreign countries. To the extent a Fund invests in emerging
market
securities
that are economically tied to a particular region, country
or group of countries, the Fund may be more sensitive to adverse political or
social events affecting that region, country or group of countries. Economic,
business, political, or social instability may affect emerging
market
securities
differently, and often more severely, than developed market
securities. A Fund that focuses its investments in multiple asset classes
of emerging
market securities may
have a limited ability to mitigate
losses in an environment that is adverse to emerging
market securities
in general. Emerging
market securities
may also be more volatile,
less liquid (particularly during market closures due to local holidays
or other
reasons) and more difficult to value than securities economically tied to
developed foreign countries. The systems and procedures for trading and
settlement of securities in emerging markets are less developed and less
transparent and transactions may take longer to settle. Emerging market
countries typically have less established legal, accounting and financial
reporting systems than those in more developed markets, which may reduce
the scope or quality of financial information available to investors.
Governments in emerging market countries are often less stable and more
likely to take extra-legal action with respect to companies, industries,
assets, or foreign ownership than those in more developed markets.
Moreover, it can be more difficult for investors to bring litigation
or enforce
judgments against issuers in emerging markets or for U.S. regulators
to bring enforcement actions against such issuers. Funds may also be
subject to Emerging Markets Risk if they invest in derivatives or other
securities or instruments whose value or return are related to the value or
returns of emerging markets securities. Rising interest rates, combined
with widening credit spreads, could negatively impact the value of
emerging market debt and increase funding costs for foreign issuers. In
such a
scenario, foreign issuers might not be able to service their debt obligations,
the market for emerging market debt could suffer from reduced liquidity,
and any investing Funds could lose money. The economy of some emerging
markets may be particularly exposed to or affected by a certain industry
or sector, and therefore issuers and/or securities of such emerging markets
may be more affected by the performance of such industries or sectors.
Sovereign
Debt Risk
Sovereign
debt risk is the risk that fixed
income instruments
issued by sovereign
entities may decline in value as a result of default or other adverse
credit event resulting from an issuer’s inability or unwillingness to
make
principal or interest payments in a timely fashion. A sovereign entity’s
failure
to make timely payments on its debt can result from many factors, including,
without limitation, insufficient foreign
(non-U.S.) currency
reserves
or an inability to sufficiently manage fluctuations in relative currency
valuations, an inability or unwillingness to satisfy the demands of creditors
and/or relevant supranational entities regarding debt service or economic
reforms, the size of the debt burden relative to economic output and
tax revenues, cash flow difficulties, and other political and social
considerations.
The risk of loss to the Fund in the event of a sovereign debt default
or other adverse credit event is heightened by the unlikelihood of any
formal recourse or means to enforce its rights as a holder of the sovereign
debt. In addition, sovereign debt restructurings, which may be shaped
by entities and factors beyond the Fund’s control, may result in a loss
in value of the Fund’s sovereign debt holdings.
Leveraging
Risk
Certain
transactions may give rise to a form of leverage. Such transactions may
include, among others, reverse
repurchase agreements, loans of portfolio
securities
and the use of when-issued,
delayed delivery or
forward
commitment transactions.
The use of derivatives
may also
create leveraging risk. In accordance with federal securities laws, rules
and
staff positions, PIMCO will attempt to mitigate the Fund’s leveraging
risk
by segregating or “earmarking” liquid assets or otherwise covering transactions
that may give rise to such risk. A Fund also may be exposed to
October
30, 2020 PROSPECTUS25
leveraging
risk by borrowing money for
investment purposes. Leverage may cause
a Fund to liquidate portfolio positions to satisfy its obligations or
to meet
segregation requirements when it may not be advantageous to do so.
Leverage, including borrowing, may
cause a Fund to be more volatile than if
the Fund had not been leveraged. This is because leverage tends to exaggerate
the effect of any increase or decrease in the value of a Fund’s portfolio
securities. Certain types of leveraging transactions, such as short sales that
are not “against the box,” (i.e., short
sales where the Fund does not hold
the security or have the right to acquire it without payment of further
consideration) could theoretically be subject to unlimited losses in
cases
where a Fund, for any reason, is unable to close out the transaction. In
addition, to the extent a Fund borrows money, interest costs on such
borrowings may not be recovered by any appreciation of the securities
purchased with the borrowed amounts and could exceed the Fund’s
investment returns, resulting in greater losses. Moreover, to make payments
of interest and other loan costs, a Fund may be forced to sell portfolio
securities when it is not otherwise advantageous to do so.
Management
and Tracking Error Risk
Each
Fund is subject to management risk. PIMCO and each individual portfolio
manager will apply investment techniques and risk analysis in making
investment decisions for the Funds, but there can be no guarantee that
these decisions will produce the desired results. Certain securities or
other
instruments in which a Fund seeks to invest may not be available in the
quantities desired. In addition, regulatory restrictions, actual or potential
conflicts
of interest or other considerations may cause PIMCO to restrict or prohibit
participation in certain investments. In such circumstances, PIMCO or
the individual portfolio managers may determine to purchase other securities
or instruments as substitutes. Such substitute securities or instruments
may not perform as intended, which could result in losses to the
Fund. Each Fund is also subject to the risk that deficiencies in the
internal
systems or controls of PIMCO or another service provider will cause losses
for the Fund or hinder Fund operations. For example, trading delays or
errors (both human and systematic) could prevent a Fund from purchasing
a security expected to appreciate in value. Additionally, legislative,
regulatory, or tax restrictions, policies or developments may affect
the investment techniques available to PIMCO and each individual portfolio
manager in connection with managing the Funds and may also adversely
affect the ability of the Funds to achieve their investment objectives.
There also can be no assurance that all of the personnel of PIMCO
will continue to be associated with PIMCO for any length of time. The
loss of services of one or more key employees of PIMCO could have an
adverse
impact on the Fund’s ability to realize its investment objective.
A
Fund may not invest in every component security of its underlying index.
Imperfect
correlation between a Fund’s portfolio and its underlying index, asset
valuation, timing variances, changes to the underlying index and regulatory
requirements may cause the Fund’s performance to diverge from the
performance of its underlying index. Tracking error may also result because
a Fund incurs fees and expenses while its underlying index does not
incur such fees and expenses. Such expenses include the costs of buying
and selling securities, such as when a Fund rebalances its portfolio
to
reflect changes in the composition of the underlying index. These expenses
may be higher for a Fund investing in foreign (non-U.S.) securities.
The
performance of a Fund and the underlying index may vary due to differences
between the Fund’s portfolio and the underlying index due to legal
restrictions, cost or liquidity restraints. The risk that performance of a
Fund and
the underlying index may vary may be heightened during periods of market
volatility or other unusual market conditions. Because an underlying
index is not subject to the tax diversification requirements to which a
Fund must adhere, the Fund may be required to deviate its investments
from the securities and relative weightings of its underlying index. For
tax efficiency purposes, a Fund may sell certain securities to realize
losses, which will result in a deviation from its underlying index. A
Fund may
not be fully invested at times either as a result of cash flows into
the Fund
or reserves of cash held by the Fund to meet redemptions and to pay
expenses. In addition, a Fund’s use of a representative sampling approach
may cause the Fund to be less correlated with the return of the underlying
index than if the Fund held all of the securities in the underlying index with
the same relative weightings as the underlying index.
Indexing
Risk
Each Fund
uses an indexing approach and may be affected by a general decline
in market segments or asset classes relating to its Underlying Index. A
Fund invests in securities and instruments included in, or representative
of, its Underlying Index regardless of the investment merits of
the Underlying Index. Generally, the index provider does not provide any
warranty,
or accept any liability, with respect to the quality, accuracy, or completeness
of either the Underlying Index or its related data. Additionally,
errors in the construction or calculation of a
Fund’s Underlying Index
may occur from time to time, and the index provider may not identify
or
correct such errors for some period of time or at all. Any such Underlying
Index
construction or calculation error may adversely impact the Fund, and
any
gains from such errors will be kept by the Fund and any losses or costs
resulting
from such errors will be borne by the Fund.
Additionally,
unusual market conditions may cause the index provider to postpone
a scheduled rebalance or reconstitution, which could cause a Fund’s
Underlying Index to vary from its normal or expected composition. This
means that, based on market and economic conditions, a Fund’s performance
could be lower than funds that may actively shift their portfolio
assets to take advantage of market opportunities or to lessen the impact
of a market decline or a decline in the value of one or more
issuers.
Disclosure
of Portfolio Holdings
Please
see “Disclosure of Portfolio Holdings” in the SAI for information about
the availability of the complete schedule of each
Fund’s holdings.
26PROSPECTUS |
PIMCO ETF Trust
Management
of the Funds
Investment
Manager
PIMCO
serves as the investment manager for the Funds. Subject to the supervision of
the Board of Trustees, PIMCO is responsible for managing the investment
activities of the Funds and the Funds’ business affairs and other administrative
matters.
PIMCO
is located at 650 Newport Center Drive, Newport Beach, CA 92660. Organized
in 1971, PIMCO provides investment management and advisory services
to private accounts of institutional and individual clients and to mutual funds.
As of September
30, 2020, PIMCO had approximately $2.03
trillion in assets
under management.
Management
Fees
Each
Fund pays for the advisory and supervisory and administrative services it
requires under what is essentially an all-in fee structure. For the fiscal year
ended
June
30, 2020, the Funds paid monthly Management Fees to PIMCO at the following
annual rates (stated as a percentage of the average daily net assets
of the Fund taken separately):
|
|
Fund
Name |
Management
Fees |
PIMCO
25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded
Fund |
0.15% |
PIMCO
1-5 Year U.S. TIPS Index Exchange-Traded Fund |
0.20% |
PIMCO
15+ Year U.S. TIPS Index Exchange-Traded Fund |
0.20% |
PIMCO
Broad U.S. TIPS Index Exchange-Traded Fund |
0.20% |
PIMCO
0-5 Year High Yield Corporate Bond Index Exchange-Traded
Fund |
0.55% |
PIMCO
Investment Grade Corporate Bond Index Exchange-Traded Fund |
0.20% |
In
addition to providing investment advisory services, PIMCO provides or procures
supervisory and administrative services for shareholders and also bears the
costs
of various third-party services required by the Funds, including audit,
custodial, portfolio accounting, legal, transfer agency and printing costs. The
Funds
bear other expenses which are not covered under the management fee which may
vary and affect the total level of expenses paid by the shareholders,
such as taxes and governmental fees, brokerage fees, commissions and other
transaction expenses, costs of borrowing money, including interest
expenses, securities lending expenses, extraordinary expenses (such as
litigation and indemnification expenses) and fees and expenses of the Trust’s
Independent
Trustees and their counsel. PIMCO generally earns a profit on the management fee
paid by the Funds. Also, under the terms of the investment management
agreement, PIMCO, and not Fund shareholders, would benefit from any price
decreases in third-party services, including decreases resulting from
an increase in net assets.
A
discussion of the basis for the Board of Trustees’ approval of the Funds’
investment management agreement is available in the Funds’ semi-annual report
to
shareholders for the fiscal half-year ended December 31, 2019.
Expense
Limitation Agreement
PIMCO
has contractually agreed, through October 31, 2021, to waive a portion of
each Fund’s Management Fee, or reimburse the Fund, to the extent that
the
Fund’s organizational expenses, pro rata share of expenses related to obtaining
or maintaining a Legal Entity Identifier and pro rata share of Trustee fees
exceed
0.0049% (the “Expense Limit”) (calculated as a percentage of average daily net
assets). The Expense Limitation Agreement will automatically renew for
one-year terms unless PIMCO provides written notice to the Trust at least 30
days prior to the end of the then current term. In any month in which the
investment
management agreement is in effect, PIMCO is entitled to reimbursement by each
Fund of any portion of the Management Fee waived or reimbursed
as set forth above (the “Reimbursement Amount”) during the previous thirty-six
months from the time of the waiver, provided that such amount paid
to PIMCO will not: 1) together with any organizational expenses, pro rata share
of expenses related to obtaining or maintaining a Legal Entity Identifier
and
pro rata Trustee fees, exceed, for such month, the Expense Limit (or the amount
of the expense limit in place at the time the amount being recouped was
originally waived if lower than the Expense Limit); 2) exceed the total
Reimbursement Amount; or 3) include any amounts previously reimbursed to
PIMCO.
October
30, 2020 PROSPECTUS27
Individual
Portfolio Managers
The
following individuals have primary responsibility for managing each of the noted
Funds.
|
|
|
|
Fund
|
Portfolio
Manager |
Since |
Recent
Professional Experience |
PIMCO
25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded
Fund PIMCO
1-5 Year U.S. TIPS Index Exchange-Traded Fund PIMCO
15+ Year U.S. TIPS Index Exchange-Traded Fund PIMCO
Broad U.S. TIPS Index Exchange-Traded Fund PIMCO
0-5 Year High Yield Corporate Bond Index Exchange-Traded
Fund PIMCO
Investment Grade Corporate Bond Index Exchange-Traded Fund |
Matt
Dorsten |
12/15 12/15 12/15 12/15 12/15 12/15 |
Executive
Vice President, PIMCO. Mr. Dorsten is a member of the quantitative
portfolio management group, focusing on quantitative strategy
and passive replication. Mr. Dorsten joined PIMCO in
2006. |
PIMCO
25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund PIMCO
1-5 Year U.S. TIPS Index Exchange-Traded Fund PIMCO
15+ Year U.S. TIPS Index Exchange-Traded Fund PIMCO
Broad U.S. TIPS Index Exchange-Traded Fund PIMCO
0-5 Year High Yield Corporate Bond Index Exchange-Traded Fund PIMCO
Investment Grade Corporate Bond Index Exchange-Traded Fund |
Graham
Rennison |
10/18 10/18 10/18 10/18 10/18 10/18 |
Senior
Vice President, PIMCO. Mr. Rennison is a member of the quantitative
portfolio management group, focusing on multi-asset class
systematic strategies. Prior to joining PIMCO in 2011, Mr. Rennison
was associated with Barclays Capital and Lehman Brothers, researching
and publishing widely on quantitative strategies in the credit
markets. |
*Inception
of the Fund.
Please
see the SAI for additional information about other accounts managed by the
portfolio managers, the portfolio managers’ compensation and the portfolio
managers’ ownership of shares of the Funds.
The
Trustees are responsible generally for overseeing the management of the Trust.
The Trustees authorize the Trust to enter into service agreements with
the
Investment Adviser, the Distributor (as defined below) and other service
providers in order to provide, and in some cases authorize service providers to
procure
through other parties, necessary or desirable services on behalf of the Trust
and the Funds. Shareholders are not parties to or third-party beneficiaries
of such service agreements. Neither this prospectus nor summary prospectus, the
Trust’s SAI, any contracts filed as exhibits to the Trust’s registration
statement, nor any other communications, disclosure documents or regulatory
filings from or on behalf of the Trust or a Fund creates a contract between
or among any shareholder of a Fund, on the one hand, and the Trust, a Fund, a
service provider to the Trust or a Fund, and/or the Trustees or officers
of the Trust, on the other hand. The Trustees (or the Trust and its officers,
service providers or other delegates acting under authority of the Trustees)
may
amend this, or use a new prospectus, summary prospectus or SAI with respect to a
Fund or the Trust, and/or amend, file and/or issue any other communications,
disclosure documents or regulatory filings, and may amend or enter into any
contracts to which the Trust or a Fund is a party, and interpret the
investment objective(s), policies, restrictions and contractual provisions
applicable to any Fund, without shareholder input or approval, except in
circumstances
in which shareholder approval is specifically required by law (such as changes
to fundamental investment policies) or where a shareholder approval
requirement is specifically disclosed in the Trust’s then-current prospectus or
SAI.
Distributor
The
Trust’s Distributor is PIMCO Investments LLC (the “Distributor”). The
Distributor, located at 1633 Broadway, New York, NY 10019, is a broker-dealer
registered
with the SEC. The Distributor distributes Creation Units for
the Funds
and does not maintain a secondary market in shares of the Funds.
Distribution
and Servicing Plan
The
Trust has adopted a Distribution and Servicing Plan (the “12b-1 Plan”) for
shares of the Funds pursuant
to Rule 12b-1 under the Investment Company Act
of 1940, as amended (the “1940 Act”). The 12b-1 Plan permits compensation in
connection with the distribution and marketing of Fund shares and/or
the
provision of certain shareholder services. The 12b-1 Plan permits the Fund to
pay compensation at an annual rate of up to 0.25% of the Fund’s average
daily
net assets. However, the Board of Trustees has determined not to authorize
payment of a 12b-1 Plan fee at this time.
The
12b-1 fee may only be imposed or increased when the Board of Trustees determines
that it is in the best interests of shareholders to do so. Because these
fees are paid out of the Fund’s assets on an ongoing basis, to the extent that a
fee is authorized, over time they will increase the cost of an investment
in
the Fund. The 12b-1 Plan fee may cost an investor more than other types of sales
charges.
Payments
to Broker-Dealers and Other Financial Intermediaries
PIMCO
or the Distributor (for purposes of this subsection only, collectively, “PIMCO”)
makes payments to broker-dealers or other financial intermediaries (each,
an “Intermediary”) related to activities that are designed to make registered
representatives, other professionals and individual investors more knowledgeable
about the Funds or for other activities, such as participation in marketing
activities and presentations, educational training programs, the support
of technology platforms and/or reporting systems. PIMCO also makes payments to
Intermediaries for certain printing, publishing and mailing costs associated
with the Funds or materials relating to ETFs in general. In addition, PIMCO
makes payments to Intermediaries that make Fund shares available to their
clients, including on no transaction fee platforms, or for otherwise promoting
the Funds. Such payments, which may be significant to the Intermediary,
28PROSPECTUS |
PIMCO ETF Trust
are not
made by a Fund. Rather, such payments are made by PIMCO from its own resources,
which may come directly or indirectly in part from management
fees paid by the Funds. Payments of this type are sometimes referred to as
marketing support or revenue-sharing payments. An Intermediary may make
decisions about which investment options it recommends or makes available, or
the level of services provided, to its customers based on the marketing
support payments it is eligible to receive. Therefore, such payments to an
Intermediary create conflicts of interest between the Intermediary and
its
customers and may cause the Intermediary to recommend a Fund over another
investment. More information regarding these payments is contained in
the SAI.
A
shareholder should contact his or her Intermediary’s salesperson or other
investment professional for more information regarding
any such payments the Intermediary firm may receive from
PIMCO.
October
30, 2020 PROSPECTUS29
Buying
and Selling Shares
Shares
of the Funds are listed for trading on a national securities exchange
during
the trading day. Each Fund’s primary listing exchange is NYSE Arca. Shares
can be bought and sold throughout the trading day like shares of other
publicly traded companies. However, there can be no guarantee that an
active trading market will develop or be maintained, or that the Fund
shares
listing will continue or remain unchanged. The Trust does not impose
any minimum investment for shares of a Fund purchased on an exchange.
Buying or selling a Fund’s shares involves certain costs that apply to
all securities transactions. When buying or selling shares of a Fund
through
a financial intermediary, you may incur a brokerage commission or other
charges determined by your financial intermediary. Due to these brokerage
costs, if any, frequent trading may detract significantly from investment
returns. In addition, you may also incur the cost of the spread (the
difference between the bid price and the ask price). The commission is
frequently
a fixed amount and may be a significant cost for investors seeking
to buy or sell small amounts of shares. The spread varies over time for
shares of a Fund based on its trading volume and market liquidity, and
is
generally less if the Fund has more trading volume and market liquidity
and
more if the Fund has less trading volume and market liquidity.
Shares
of a Fund may be acquired through the Distributor or redeemed directly
with the Fund only in Creation Units or multiples thereof, as discussed
in the “Creations and Redemptions” section of the SAI. Once created,
shares of a Fund generally trade in the secondary market in amounts
less than a Creation Unit.
The
Trust’s Board of Trustees has not adopted a policy of monitoring for
frequent
purchases and redemptions of Fund shares (“frequent trading”) that
appear to attempt to take advantage of potential arbitrage opportunities
presented by a lag between a change in the value of a Fund’s portfolio
securities after the close of the primary markets for the Fund’s portfolio
securities and the reflection of that change in the Fund’s NAV (“market
timing”). The Trust believes this is appropriate because an ETF, such
as each Fund, is intended to be attractive to arbitrageurs, as trading
activity
is critical to ensuring that the market price of Fund shares remains
at
or close to NAV. Since each Fund issues and redeems Creation Units at
NAV
plus applicable transaction fees, and each Fund’s shares may be purchased
and sold on NYSE Arca at prevailing market prices, the risks of frequent
trading are limited.
New
York Stock Exchange (“NYSE”) is open for trading Monday through Friday
and is closed on the following holidays: New Year’s Day, Martin Luther
King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
A
“Business Day” with respect to the Funds is each day NYSE is open.
Orders
from Authorized Participants to create or redeem Creation Units will
only
be accepted on a Business Day. On days when NYSE closes earlier
than
normal, a Fund may require orders to create or redeem Creation Units
to
be placed earlier in the day. See the SAI for more information.
Section
12(d)(1) of the 1940 Act restricts investments by registered investment
companies in the securities of other investment companies. Registered
investment companies are permitted to invest in the Funds beyond
the limits set forth in Section 12(d)(1), subject to certain terms and
conditions
set forth in an SEC exemptive order issued to PIMCO and the Trust,
including that such investment companies enter into an agreement with the
Trust.
The
Trust typically does not offer or sell its shares to non-U.S. resident
Authorized
Participants. For purposes of this policy, a U.S. resident Authorized
Participant is defined as an Authorized Participant that has a
U.S.
address of record at the time of sale.
Book
Entry
Shares
of a
Fund are held in book-entry form, which means that no stock certificates
are issued. The Depository Trust Company (“DTC”) or its nominee
is the record owner of all outstanding shares of the Funds
and is recognized
as the owner of all shares for all purposes.
Investors
owning shares of a
Fund are beneficial owners as shown on the records
of DTC or its participants. DTC serves as the securities depository for
shares
of the Funds.
DTC participants include securities brokers and dealers, banks,
trust companies, clearing corporations and other institutions that directly
or indirectly maintain a custodial relationship with DTC. As a beneficial
owner of shares, you are not entitled to receive physical delivery of
stock certificates or to have shares registered in your name, and you are
not
considered a registered owner of shares. Therefore, to exercise any right
as
an owner of shares, you must rely upon the procedures of DTC and its
participants.
These procedures are the same as those that apply to any other
exchange-traded securities that you hold in book-entry or “street name”
form.
Share
Prices
The
trading prices of a Fund’s shares in the secondary market generally differ
from the Fund’s daily NAV per share and are affected by market forces
such as supply and demand, economic conditions and other factors.
Information
regarding the intraday indicative value (“IIV”) of a Fund may be
disseminated every 15 seconds throughout the trading day by the national
securities exchange on which the Fund’s shares are primarily listed or
by market data vendors or other information providers. The IIV is based
on
the current market value of the securities and/or cash included in a
Fund’s
IIV basket. The IIV does not necessarily reflect the precise composition
of the current portfolio of securities and instruments held by a Fund
at a particular point in time or the best possible valuation of the current
portfolio. Unlike a Fund’s NAV, the IIV may not reflect estimated accrued
interest, dividends and other income, or Fund expenses. Therefore, the
IIV should not be viewed as a “real-time” update of the NAV, which is
computed
only once a day. The IIV is generally determined by using both current
market quotations and/or price quotations obtained from broker-dealers
that may trade in the portfolio securities and instruments included in
a Fund’s IIV basket. The Fund is not involved in, or responsible for, the
calculation
or dissemination of the IIV and makes no representation or warranty
as to its accuracy. An inaccuracy in the IIV could result from various
factors, including the difficulty of pricing portfolio instruments on an
intraday
basis.
Premiums
and Discounts
There
may be differences between the daily market prices on secondary markets
for shares of a Fund and the Fund’s NAV. NAV is the price per
30PROSPECTUS |
PIMCO ETF Trust
share at
which the Fund issues and redeems shares. See “How Net Asset Value Is
Determined” below. A Fund’s market price may be at, above or below its
NAV. The NAV of a Fund will fluctuate with changes in the market
value of its portfolio holdings. The market price of a Fund will fluctuate
in accordance with changes in its NAV, as well as market supply and
demand. Information regarding a Fund’s NAV and market price can be found at
https://www.pimco.com/en-us/investments/etf.
Premiums
or discounts are the differences (expressed as a percentage) between
the NAV and the market price of a Fund on a given day, generally at
the time the NAV is calculated. A premium is the amount that a Fund is
trading
above the reported NAV, expressed as a percentage of the NAV. A discount
is the amount that a Fund is trading below the reported NAV, expressed
as a percentage of the NAV. A discount or premium could be significant.
Information regarding the frequency of daily premiums or discounts,
generally at the time the NAV is calculated, can be found at www.pimcoetfs.com.
Expenses
An
index is a statistical composite that tracks a specified financial market or
sector.
Unlike a Fund, an index does not actually hold a portfolio of securities
and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, index
returns
do not include brokerage commissions that may be payable on secondary
market transactions. If brokerage commissions were included, index
returns would be lower. The index’s returns do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions
or
the redemption or sale of Fund shares. The investment return and principal
value of shares of a Fund will vary with changes in market conditions.
Shares of a Fund may be worth more or less than their original cost
when they are redeemed or sold in the market.
Request
for Multiple Copies of Shareholder Documents
To
reduce expenses, it is intended that only one copy of the Fund’s
prospectus and each annual and semi-annual report, when
available, will be mailed to those addresses shared by two or
more accounts. If you wish to receive individual copies of these
documents, please contact the financial intermediary through
which you hold your shares.
How
Net Asset Value Is Determined
The
NAV of a Fund is determined by dividing the total value of a Fund’s portfolio
investments and other assets attributable to that Fund, less any liabilities,
by the total number of shares outstanding of that Fund.
On
each day that the NYSE is open, Fund shares are ordinarily valued as of
the
close of regular trading (“NYSE Close”). Information that becomes known
to the Funds or their agents after the time as of which NAV has been
calculated on a particular day will not generally be used to retroactively
adjust the price of a security or the NAV determined earlier that
day. If regular trading on the NYSE closes earlier than scheduled, each
Fund
reserves the right to either (i) calculate its NAV as of the earlier closing
time
or (ii) calculate its NAV as of the normally scheduled close of regular
trading
on the NYSE for that day. Each Fund generally does not calculate its
NAV
on days during which the NYSE is closed. However, if the NYSE is
closed on
a day it would normally be open for business, each Fund reserves the right
to calculate its NAV as of the normally scheduled close of regular trading on
the NYSE for that day or such other time that the Fund may determine.
For
purposes of calculating NAV, portfolio securities and other assets for
which
market quotes are readily available are valued at market value. Market
value is generally determined on the basis of official closing prices
or
the last reported sales prices, or if no sales are reported, based on quotes
obtained
from established market makers or prices (including evaluated prices)
supplied by the Funds’ approved pricing services, quotation reporting
systems and other third-party sources (together, “Pricing Services”).
The Funds will normally use pricing data for domestic equity securities
received shortly after the NYSE Close and do not normally take into
account trading, clearances or settlements that take place after the
NYSE
Close. A foreign (non-U.S.) equity security traded on a foreign exchange
or on more than one exchange is typically valued using pricing information
from the exchange considered by PIMCO to be the primary exchange.
If market value pricing is used, a foreign (non-U.S.) equity security
will be valued as of the close of trading on the foreign exchange, or
the
NYSE Close, if the NYSE Close occurs before the end of trading on the
foreign
exchange. Domestic and foreign (non-U.S.) fixed income securities, non-exchange
traded derivatives, and equity options are normally valued on
the basis of quotes obtained from brokers and dealers or Pricing Services
using
data reflecting the earlier closing of the principal markets for those
securities.
Prices obtained from Pricing Services may be based on, among other
things, information provided by market makers or estimates of market
values obtained from yield data relating to investments or securities
with
similar characteristics. Certain fixed income securities purchased on a
delayed-delivery
basis are marked to market daily until settlement at the forward
settlement date. Exchange-traded options, except equity options, futures
and options on futures are valued at the settlement price determined
by the relevant exchange. Swap agreements are valued on the basis
of bid quotes obtained from brokers and dealers or market-based prices
supplied by Pricing Services or other pricing sources. With respect to
any
portion of a Fund’s assets that are invested in one or more open-end
management
investment companies (other than ETFs), the Fund’s NAV will be
calculated based upon the NAVs of such investments.
If
a foreign (non-U.S.) equity security’s value has materially changed after
the
close of the security’s primary exchange or principal market but before
the
NYSE Close, the security may be valued at fair value based on procedures
established and approved by the Board of Trustees. Foreign (non-U.S.)
equity securities that do not trade when the NYSE is open are also
valued at fair value. With respect to foreign (non-U.S.) equity securities,
the
Fund may determine the fair value of investments based on information
provided
by Pricing Services and other third-party vendors, which may recommend
fair value or adjustments with reference to other securities, indexes
or assets. In considering whether fair valuation is required and in determining
fair values, the Fund may, among other things, consider significant
events (which may be considered to include changes in the value of
U.S. securities or securities indexes) that occur after the close of the
relevant
market and before the NYSE Close. A Fund may utilize modeling tools
provided by third-party vendors to determine fair values of non-U.S.
securities.
For these purposes, any movement in the applicable reference
October
30, 2020 PROSPECTUS31
index or
instrument (“zero trigger”) between the earlier close of the applicable
foreign market and the NYSE Close may be deemed to be a significant
event, prompting the application of the pricing model (effectively resulting
in daily fair valuations). Foreign (non-U.S.) exchanges may permit trading in
foreign (non-U.S.) equity securities on days when the Trust is not open for
business, which may result in a Fund’s portfolio investments being affected
when you are unable to buy or sell shares.
Senior
secured floating rate loans for which an active secondary market exists
to a reliable degree will be valued at the mean of the last available
bid/ask
prices in the market for such loans, as provided by a Pricing Service.
Senior
secured floating rate loans for which an active secondary market does
not exist to a reliable degree will be valued at fair value, which is
intended
to approximate market value. In valuing a senior secured floating rate
loan at fair value, the factors considered may include, but are not limited
to, the following: (a) the creditworthiness of the borrower and any intermediate
participants, (b) the terms of the loan, (c) recent prices in the market
for similar loans, if any, and (d) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
Investments
valued in currencies other than the U.S. dollar are converted to the
U.S. dollar using exchange rates obtained from Pricing Services. As a
result,
the value of such investments, and in turn, the NAV of the Fund’s shares
may be affected by changes in the value of currencies in relation to
the
U.S. dollar. The value of investments traded in markets outside the United
States or denominated in currencies other than the U.S. dollar may be
affected significantly on a day that the Trust is not open for business. As
a
result, to the extent that a Fund holds foreign (non-U.S.) investments, the
value
of those investments may change at times when shareholders are unable
to buy or sell shares and the value of such investments will be reflected
in the Fund’s next calculated NAV. Investments for which market quotes
or market based valuations are not readily available are valued at fair
value as determined in good faith by the Board of Trustees or persons
acting
at their direction. The Board of Trustees has adopted methods for valuing
securities and other assets in circumstances where market quotes are
not readily available, and has delegated to PIMCO the responsibility for
applying
the fair valuation methods. In the event that market quotes or market
based valuations are not readily available, and the security or asset
cannot
be valued pursuant to a Board approved valuation method, the value
of the security or asset will be determined in good faith by the Valuation
Oversight Committee of the Board of Trustees, generally based on
recommendations provided by PIMCO. Market quotes are considered not
readily available in circumstances where there is an absence of current
or
reliable market-based data (e.g.,
trade information, bid/ask information, broker
quotes, Pricing Services’ prices), including where events occur after
the
close of the relevant market, but prior to the NYSE Close, that materially
affect the values of the Fund’s securities or assets. In addition, market
quotes are considered not readily available when, due to extraordinary
circumstances, the exchanges or markets on which the securities
trade do not open for trading for the entire day and no other market
prices are available. The Board of Trustees has delegated to PIMCO the
responsibility for monitoring significant events that may materially affect
the
values of the Fund’s securities or assets and for determining whether
the value
of the applicable securities or assets should be reevaluated in light of
such significant events.
When
the Fund uses fair valuation to determine the value of a portfolio security
or other asset for purposes of calculating its NAV, such investments
will
not be priced on the basis of quotes from the primary market in which
they
are traded, but rather may be priced by another method that the Board
of Trustees or persons acting at their direction believe reflects fair
value.
Fair valuation may require subjective determinations about the value
of
a security. While the Trust’s policy is intended to result in a calculation of
the
Fund’s NAV that fairly reflects security values as of the time of pricing,
the
Trust cannot ensure that fair values determined by the Board of Trustees
or persons acting at their direction would accurately reflect the price
that a Fund could obtain for a security if it were to dispose of that
security
as of the time of pricing (for instance, in a forced or distressed sale).
The
prices used by the Fund may differ from the value that would be realized
if the securities were sold.
Fund Distributions
Each
Fund distributes substantially all of its net investment income to shareholders
in the form of dividends. The Funds, except the PIMCO 25+ Year
Zero Coupon U.S. Treasury Index Exchange-Traded Fund, intend to declare
income dividends and distribute them monthly to shareholders of record.
The PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded
Fund intends to declare and distribute income dividends quarterly to
shareholders
of record. In addition, each Fund distributes any net capital gains
earned from the sale of portfolio securities to shareholders no less
frequently
than annually. Net short-term capital gains may be paid more frequently.
Dividend payments are made through DTC participants and indirect
participants to beneficial owners then of record with proceeds received
from the Funds.
No
dividend reinvestment service is provided by the Trust. Financial intermediaries
may make available the DTC book-entry Dividend Reinvestment
Service for use by beneficial owners of Fund shares for reinvestment
of their dividend distributions. Beneficial owners should contact
their financial intermediary to determine the availability and costs of
the
service and the details of participation therein. Financial intermediaries
may
require beneficial owners to adhere to specific procedures and timetables.
If this service is available and used, dividend distributions of both
income and net capital gains will automatically be reinvested in additional
whole shares of a Fund purchased in the secondary market.
Tax
Consequences
The
following information is meant as a general summary for U.S. taxpayers.
Please see the SAI for additional information. You should rely on your
own tax adviser for advice about the particular federal, state and local
tax
consequences to you of investing in any Fund.
■ |
Taxes
on Fund Distributions.
If you are subject to U.S. federal income
tax, you will be subject to tax on taxable Fund distributions.
For federal income tax purposes, taxable Fund distributions
will be taxable to you as either ordinary income or capital
gains. |
32PROSPECTUS |
PIMCO ETF Trust
Fund
taxable dividends (i.e.,
distributions of investment income) are generally
taxable to you as ordinary income. Federal taxes on Fund distributions
of gains are determined by how long a Fund owned the investments
that generated the gains, rather than how long you have owned
your shares. Distributions of gains from investments that the Fund owned
for more than one year will generally be taxable to you as long-term
capital
gains. Distributions of gains from investments that the Fund owned for
one year or less, including income from securities lending, will generally
be
taxable to you as ordinary income.
The
tax treatment of income, gains and losses attributable to foreign currencies
(and derivatives on such currencies), and various other special tax
rules applicable to certain financial transactions and instruments could
affect
the amount, timing and character of a Fund’s distributions. In some cases,
these tax rules could also result in a retroactive change in the tax
character
of prior distributions and may also possibly cause all, or a portion,
of
prior distributions to be reclassified as returns of capital for tax purposes.
See
“Returns of Capital” below.
Fund
distributions are taxable to you even if they are paid from income or
gains
earned by the Fund prior to your investment and thus were included in
the price you paid for your shares. For example, if you purchase shares
on
or just before the record date of a Fund distribution, you will pay full
price
for the shares and may receive a portion of your investment back as a
taxable
distribution.
■ |
Taxes
When You Sell Your Shares.
Any gain resulting from the
sale of Fund shares will generally be subject to federal income
tax.
Currently, any capital gain or loss realized upon a sale of Fund
shares is generally treated as a long-term gain or loss if the
shares
have been held for more than one year. Any capital gain or loss
realized upon a sale of Fund shares held for one year or less is
generally treated as short-term gain or loss, except that any capital
loss on the sale of shares held for six months or less is treated
as long-term capital loss to the extent that capital gain dividends
were paid with respect to such shares. |
■ |
Returns
of Capital.
If a Fund’s distributions exceed its taxable income
and capital gains realized during a taxable year, all or a portion
of the distributions made in the same taxable year may be recharacterized
as a return of capital to shareholders. A return of capital
distribution will generally not be taxable, but will reduce each
shareholder’s cost basis in the Fund and result in a higher reported
capital gain or lower reported capital loss when those shares
on which the distribution was received are
sold. |
■ |
A
Note on the PIMCO 1-5 Year U.S. TIPS Index Exchange-Traded
Fund, the PIMCO 15+ Year U.S. TIPS Index Exchange-Traded
Fund, and the PIMCO Broad U.S. TIPS Index
Exchange-Traded Fund.
Periodic adjustments for inflation
to the principal amount of an inflation-indexed bond may give
rise to original issue discount, which will be includable in a
Fund’s
gross income. Due to original issue discount, a Fund may be
required to make annual distributions to shareholders that exceed
the cash received, which may cause the Fund to liquidate certain
investments when it is not advantageous to do so. Also, if the
principal value of an inflation-indexed bond is adjusted
|
|
downward
due to deflation, amounts previously distributed in the taxable
year of such adjustment may be characterized in some circumstances
as a return of capital. |
■ |
Medicare
Tax.
An additional 3.8% Medicare tax is imposed on certain
net investment income (including ordinary dividends and capital
gain distributions received from a Fund and net gains from redemptions
or other taxable dispositions of Fund shares) of U.S. individuals,
estates and trusts to the extent that such person’s “modified
adjusted gross income” (in the case of an individual) or “adjusted
gross income” (in the case of an estate or trust) exceeds
certain threshold amounts. |
■ |
Important
Tax Reporting Considerations. The
Internal Revenue
Code of 1986 requires reporting of adjusted cost basis information
for covered securities, which generally include shares of
a regulated investment company acquired after January 1, 2012,
to the Internal Revenue Service (“IRS”) and to taxpayers. Shareholders
should contact their financial intermediaries with respect
to reporting of cost basis and available elections for their accounts. |
■ |
Backup
Withholding.
Shareholders may be subject to U.S. federal
income tax withholding with respect to distributions payable
to shareholders if they fail to provide the Fund with their correct
taxpayer identification number or to make required certifications,
or if they have been notified by the IRS that they are subject
to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against U.S.
federal income tax liability. |
■ |
Foreign
Withholding Taxes.
A Fund may be subject to foreign withholding
or other foreign taxes, which in some cases can be significant
on any income or gain from investments in foreign securities.
In that case, the Fund’s total return on those securities would
be decreased. Although in some cases the Fund may be able
to apply for a refund of a portion of such taxes, the ability to
successfully
obtain such a refund may be uncertain. Each Fund may
generally deduct these taxes in computing its taxable income. Rather
than deducting these foreign taxes, a Fund that invests more
than 50% of its assets in the stock or securities of foreign corporations
or foreign governments at the end of its taxable year may
make an election to treat a proportionate amount of eligible foreign
taxes as constituting a taxable distribution to each shareholder,
which would, subject to certain limitations, generally allow
the shareholder to either (i) credit that proportionate amount
of taxes against U.S. Federal income tax liability as a foreign
tax credit or (ii) take that amount as an itemized deduction. |
Foreign
shareholders may be subject to U.S. tax withholding of 30% (or lower
applicable treaty rate) on distributions from the Funds. Additionally,
the
Funds are required to withhold U.S. tax (at a 30% rate) on payments of
taxable
dividends made to certain non-U.S. entities that fail to comply (or are
deemed noncompliant) with extensive reporting and withholding requirements
designed to inform the U.S. Department of the Treasury of U.S.-owned
foreign investment accounts. Shareholders may be requested
October
30, 2020 PROSPECTUS33
to provide
additional information to enable the Funds to determine whether withholding
is required.
This
“Tax Consequences” section relates only to federal income tax; the consequences
under other tax laws may differ. Shareholders should consult their
tax advisors as to the possible application of foreign, state and local
income
tax laws to Fund dividends and capital distributions. Please see the
“Taxation”
in the SAI for additional information regarding the tax aspects of
investing in the Funds.
Characteristics
and Risks of Securities and Investment Techniques
This
section provides additional information about some of the principal investments
and related risks of the Funds described under “Fund Summaries”
and “Description of Principal Risks” above. It also describes characteristics
and risks of additional securities and investment techniques that
may be used by the Funds from time to time. Most of these securities
and
investment techniques described herein are discretionary, which means
that
PIMCO can decide whether to use them or not. This prospectus does not
attempt to disclose all of the various types of securities and investment
techniques
that may be used by the Funds. As with any fund, investors in the
Funds rely on the professional investment judgment and skill of PIMCO
and
the individual portfolio managers. Please see “Investment Objectives
and
Policies” in the SAI for more detailed information about the securities
and
investment techniques described in this section and about other strategies
and techniques that may be used by the Funds.
Investors
should be aware that the investments made by a Fund and the results
achieved by a Fund at any given time are not expected to be the same
as those made by other funds for which PIMCO acts as investment adviser,
including funds with names, investment objectives and policies similar
to a Fund. This may be attributable to a wide variety of factors, including,
but not limited to, the use of a different portfolio management team
or strategy, when a particular fund commenced operations or the size
of
a particular fund, in each case as compared to other similar funds. Significant purchases
and redemptions of its Creation Units may adversely impact
a Fund’s portfolio management. For example, a Fund may be forced to
sell a comparatively large portion of its portfolio to meet significant
Creation
Unit redemptions for cash, or hold a comparatively large portion of its
portfolio in cash due to significant Creation Unit purchases for cash, in
each
case when the Fund otherwise would not seek to do so. Such transactions
may cause Funds to make investment decisions at inopportune
times or prices or miss attractive investment opportunities. Such
transactions may also accelerate the realization of taxable income if
sales
of securities resulted in gains and the Fund redeems Creation Units for
cash,
or otherwise cause a Fund to perform differently than intended. Similarly,
significant purchases of its Creation Units for cash may adversely affect
a Fund’s performance to the extent the Fund is delayed in investing new
cash and, as a result, holds a proportionally larger cash position than
under
ordinary circumstances. While such risks may apply to Funds of any
size,
such risks are heightened in Funds with fewer assets under management.
In addition, new Funds may not be able to fully implement their
investment strategy immediately upon commencing investment operations,
which could reduce investment performance.
Certain
PIMCO-advised funds (the “PIMCO Funds of Funds”) invest substantially
all or a significant portion of their assets in other PIMCO-advised
funds, including the Funds (“Underlying PIMCO Funds”). In some cases,
the PIMCO Funds of Funds and certain funds managed by investment
advisers affiliated with PIMCO (“Affiliated Funds of Funds”) may
be the predominant or sole shareholders of a particular Underlying PIMCO
Fund. Investment decisions made with respect to the PIMCO Funds of
Funds and Affiliated Funds of Funds could, under certain circumstances,
negatively
impact the Underlying PIMCO Funds with respect to the expenses
and investment performance of the Underlying PIMCO Funds. For instance,
large purchases or redemptions of exchange-traded shares of a Fund
by the PIMCO Funds of Funds and Affiliated Funds of Funds, whether as
part of a reallocation or rebalancing strategy or otherwise, may indirectly
result
in the Underlying PIMCO Fund having to sell securities or invest cash
when
it otherwise would not do so. Such transactions could increase an Underlying
PIMCO Fund’s transaction costs and accelerate the realization of taxable
income if sales of securities resulted in gains and the Fund redeems
Creation
Units for cash. Additionally, as the PIMCO Funds of Funds and Affiliated
Funds of Funds may invest substantially all or a significant portion
of
their assets in Underlying PIMCO Funds, the Underlying PIMCO Funds may
not acquire securities of other registered open-end investment companies
in reliance on Section 12(d)(1)(F) or Section 12(d)(1)(G) of the 1940
Act, thus limiting the Underlying PIMCO Funds’ investment
flexibility.
Investment Selection
Each
Fund seeks total return that closely corresponds, before fees and expenses,
to the total return of the Funds’ underlying index. The “total return”
sought by a Fund consists of both income earned on a Fund’s investments
and capital appreciation, if any, arising from increases in the market
value of a Fund’s holdings. Capital appreciation of fixed income securities
generally results from decreases in market interest rates, foreign currency
appreciation, or improving credit fundamentals for a particular sector
or security. Capital appreciation of inflation-linked bonds, such as
TIPS,
generally results from decreases in real interest rates and increased
inflation.
In
selecting securities and instruments for a Fund, PIMCO seeks to track the
component
securities of a Fund’s underlying index. PIMCO may invest in a combination
of component securities and other investments, or in component
securities but in different proportions as compared to the weighting
of the underlying index, such that the portfolio effectively provides
exposure to the underlying index. When using a representative sampling
strategy, PIMCO attempts to match the risk and return characteristics
of a Fund’s portfolio to the risk and return characteristics of a Fund’s
underlying index. PIMCO subdivides the underlying index into small categories
of securities with similar features and characteristics. PIMCO generally
divides the underlying index into parameters that determine a particular
bond’s risk and expected return (e.g.,
duration, sector, credit rating,
coupon, and the presence of any embedded options). After each security
in the underlying index is assigned to a subcategory, PIMCO begins to
construct a Fund’s portfolio by selecting representative bonds from each
subcategory.
The representative sample of bonds chosen from each subcategory
is intended to closely correlate to the duration, sector, credit
34PROSPECTUS |
PIMCO ETF Trust
rating,
coupon and option characteristics of the underlying index as a whole.
There
are many potential benefits to using a representative sampling strategy
with respect to a Fund. For example, PIMCO can avoid bonds that are
relatively expensive (i.e.,
bonds that trade at perceived higher prices or lower
yields due to supply demand) but have the same relative risk, value,
duration
and other characteristics as less expensive bonds. In addition, the use
of sampling techniques permit PIMCO to exclude bonds that it believes
will
soon be deleted from the underlying index. PIMCO can also avoid holding
bonds it deems less liquid than other bonds with similar characteristics
which facilitates a more tradable portfolio. Furthermore, PIMCO
can develop a basket of component securities that is easier to construct
and less expensive to trade, thereby potentially improving arbitrage
opportunities.
Fixed
Income Instruments
“Fixed
Income Instruments,” as used generally in this prospectus,
includes:
■ |
securities
issued or guaranteed by the U.S. Government, its agencies
or government-sponsored enterprises (“U.S. Government Securities”); |
■ |
corporate
debt securities of U.S. and non-U.S. issuers, including convertible
securities and corporate commercial
paper; |
■ |
mortgage-backed
and other asset-backed securities; |
■ |
inflation-indexed
bonds issued both by governments and corporations; |
■ |
structured
notes, including hybrid or “indexed” securities and event-linked
bonds; |
■ |
bank
capital and trust preferred securities; |
■ |
loan
participations and assignments; |
■ |
delayed
funding loans and revolving credit
facilities; |
■ |
bank
certificates of deposit, fixed time deposits and bankers’ acceptances; |
■ |
repurchase
agreements on Fixed Income Instruments and reverse repurchase
agreements on Fixed Income Instruments; |
■ |
debt
securities issued by states or local governments and their agencies,
authorities and other government-sponsored enterprises; |
■ |
obligations
of non-U.S. governments or their subdivisions, agencies
and government-sponsored enterprises;
and |
■ |
obligations
of international agencies or supranational
entities. |
Securities
issued by U.S. Government agencies or government-sponsored enterprises
may not be guaranteed by the U.S. Treasury.
The
Funds, to the extent permitted by the 1940 Act, or exemptive relief
therefrom,
may invest in derivatives based on Fixed Income Instruments.
Duration
Duration
is a measure used to determine the sensitivity of a security’s price
to
changes in interest rates that incorporates a security’s yield, coupon, final
maturity
and call features, among other characteristics. The longer a security’s
duration, the more sensitive it will be to changes in interest rates.
Similarly,
a fund with a longer average portfolio duration will be more sensitive
to changes in interest rates than a fund with a shorter average
portfolio
duration. By way of example, the price of a bond fund with an average
duration of eight years would be expected to fall approximately 8% if
interest rates rose by one percentage point. Similarly, the price of a
bond fund
with an average duration of fifteen years would be expected to fall
approximately 15% if interest rates rose by one percentage point. Conversely,
the price of a bond fund with an average duration of negative three
years would be expected to rise approximately 3% if interest rates rose by
one percentage point. The maturity of a security, another commonly used
measure of price sensitivity, measures only the time until final payment is
due, whereas duration takes into account the pattern of all payments
of interest and principal on a security over time, including how these
payments are affected by prepayments and by changes in interest rates, as
well as the time until an interest rate is reset (in the case of variable-rate
securities). PIMCO uses an internal model for calculating duration,
which may result in a different value for the duration of an index compared
to the duration calculated by the index provider or another third party.
U.S.
Government Securities
U.S.
Government Securities are obligations of, or guaranteed by, the U.S.
Government,
its agencies or government-sponsored enterprises. The U.S. Government
does not guarantee the NAV of a Fund’s shares. U.S. Government
Securities are subject to market and interest rate risk, as well
as varying
degrees of credit risk. Some U.S. Government Securities are issued
or guaranteed by the U.S. Treasury and are supported by the full faith
and credit of the United States. Other types of U.S. Government Securities
are supported by the full faith and credit of the United States (but
not
issued by the U.S. Treasury). These securities may have less credit risk
than
U.S. Government Securities not supported by the full faith and credit
of
the United States. Such other types of U.S. Government Securities are:
(1)
supported by the ability of the issuer to borrow from the U.S. Treasury;
(2)
supported only by the credit of the issuing agency, instrumentality or
government-sponsored
corporation; or (3) supported by the United States in
some other way. These securities may be subject to greater credit risk.
U.S.
Government Securities include zero coupon securities, which do not distribute
interest on a current basis and tend to be subject to greater market
risk than interest-paying securities of similar maturities.
Securities
issued by U.S. Government agencies or government-sponsored enterprises
may not be guaranteed by the U.S. Treasury. Government National
Mortgage Association (“GNMA”), a wholly owned U.S. Government
corporation, is authorized to guarantee, with the full faith and credit
of the U.S. Government, the timely payment of principal and interest
on
securities issued by institutions approved by GNMA and backed by pools
of
mortgages insured by the Federal Housing Administration or guaranteed
by
the Department of Veterans Affairs. Government-related guarantors (i.e.,
not
backed by the full faith and credit of the U.S. Government) include the
Federal
National Mortgage Association (“FNMA”) and the Federal Home Loan
Mortgage Corporation (“FHLMC”). Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by FNMA
but are not backed by the full faith and credit of the U.S. Government.
FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but its participation certificates are not backed
by the full faith and credit of the U.S. Government. Under the
October
30, 2020 PROSPECTUS35
direction
of the Federal Housing Finance Agency, FNMA and FHLMC have entered
into a joint initiative to develop a common securitization platform for the
issuance of a uniform mortgage-backed security (the “Single Security
Initiative”) that aligns the characteristics of FNMA and FHLMC certificates.
The Single Security Initiative was implemented in June 2019, and the
effects it may have on the market for mortgage-backed securities are
uncertain.
Mortgage-Related
and Other Asset-Backed Securities
Mortgage-related
securities include mortgage pass-through securities, collateralized
mortgage obligations (“CMOs”), commercial mortgage-backed
securities, mortgage dollar rolls, CMO residuals, stripped mortgage-backed
securities (“SMBSs”) and other securities that directly or indirectly
represent
a participation in, or are secured by and payable from, mortgage loans
on real property. A to-be-announced (“TBA”) transaction is a method of
trading mortgage-backed securities. In a TBA transaction, the buyer and
seller
agree upon general trade parameters such as agency, settlement date,
par amount and price. The actual pools delivered generally are determined
two days prior to the settlement date.
The
value of some mortgage-related and other asset-backed securities may
be
particularly sensitive to changes in prevailing interest rates. Early
repayment
of principal on some mortgage-related securities may expose a Fund
to a lower rate of return upon reinvestment of principal. When interest
rates rise, the value of a mortgage-related security generally will decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other
fixed income securities. The rate of prepayments on underlying mortgages
will affect the price and volatility of a mortgage-related security,
and
may shorten or extend the effective maturity of the security beyond what
was anticipated at the time of purchase. If unanticipated rates of prepayment
on underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of the security can be expected to increase.
See “Extension Risk” and “Prepayment Risk” below. The value of these
securities may fluctuate in response to the market’s perception of the
creditworthiness
of the issuers. Additionally, although mortgages and mortgage-related
securities are generally supported by some form of government
or private guarantee and/or insurance, there is no assurance that
guarantors or insurers will meet their obligations.
■ |
Extension
Risk.
Mortgage-related and other asset-backed securities
are subject to Extension Risk, which is the risk that the issuer
of such a security pays back the principal of such an obligation
later than expected. This may occur when interest rates rise.
This may negatively affect Fund returns, as the value of the security
decreases when principal payments are made later than expected.
In addition, because principal payments are made later than
expected, the Fund may be prevented from investing proceeds
it would otherwise have received at a given time at the higher
prevailing interest rates. |
■ |
Prepayment
Risk.
Mortgage-related and other asset-backed securities
are subject to Prepayment Risk, which is the risk that the
issuer of such a security pays back the principal of such an obligation
earlier than expected (due to the sale of the underlying property,
refinancing, or foreclosure). This may occur when
|
|
interest
rates decline. Prepayment may expose the Fund to a lower
rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, the
value of the premium would be lost in the event of prepayment. |
One
type of SMBS has one class receiving all of the interest from the mortgage
assets (the interest-only, or “IO” class), while the other class will
receive
all of the principal (the principal-only, or “PO” class). The yield to
maturity
on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets, and a
rapid rate of principal payments may have a material adverse effect on
a Fund’s
yield to maturity from these securities.
Certain
Funds may invest in each of collateralized bond obligations (“CBOs”),
collateralized loan obligations (“CLOs”), other collateralized debt
obligations (“CDOs”) and other similarly structured securities. CBOs,
CLOs
and other CDOs are types of asset-backed securities. A CBO is a trust
which
is backed by a diversified pool of high risk, below investment grade
fixed
income securities. A CLO is a trust typically collateralized by a pool of
loans,
which may include, among others, domestic and foreign senior secured
loans, senior unsecured loans, and subordinate corporate loans, including
loans that may be rated below investment grade or equivalent unrated
loans. Other CDOs are trusts backed by other types of assets representing
obligations of various parties. Certain Funds may invest in
other
asset-backed securities that have been offered to investors.
Reinvestment
Each
Fund may be subject to the risk that the returns of the Fund will decline
during periods of falling interest rates because the Fund may have to
reinvest the proceeds from matured, traded or called debt obligations at
interest
rates below the Fund’s current earnings rate. For instance, when interest
rates decline, an issuer of debt obligations may exercise an option to
redeem securities prior to maturity, thereby forcing the Fund to invest in
lower-yielding
securities. A Fund also may choose to sell higher-yielding portfolio
securities and to purchase lower-yielding securities to achieve greater
portfolio diversification, because the Fund’s portfolio manager believes
the current holdings are overvalued or for other investment-related reasons.
A decline in the returns received by a Fund from its investments is likely
to have an adverse effect on the Fund’s NAV, yield and total
return.
Focused
Investment
To
the extent that a Fund focuses its investments in a particular sector, the
Fund
may be susceptible to loss due to adverse developments affecting that
sector.
These developments include, but are not limited to, governmental regulation;
inflation; rising interest rates; cost increases in raw materials, fuel
and other operating expenses; technological innovations that may render
existing products and equipment obsolete; competition from new entrants;
high research and development costs; increased costs associated with
compliance with environmental or other governmental regulations; and
other economic, business or political developments specific to that sector.
Furthermore, a Fund may invest a substantial portion of its assets in
companies
in related sectors that may share common characteristics, are often
subject to similar business risks and regulatory burdens, and whose securities
may react similarly to the types of developments described above,
36PROSPECTUS |
PIMCO ETF Trust
which will
subject the Fund to greater risk. A Fund also will be subject to focused
investment risk to the extent that it invests a substantial portion of
its assets
in a particular issuer, market, asset class, country or geographic region.
Loan
Participations and Assignments
Certain
Funds may invest in fixed- and floating-rate loans, which investments
generally will be in the form of loan participations and assignments
of portions of such loans. Participations and assignments involve
special types of risk, including credit risk, interest rate risk, liquidity
risk,
and the risks of being a lender. If a Fund purchases a participation, it
may
only be able to enforce its rights through the lender, and may assume
the
credit risk of the lender in addition to the borrower.
Corporate
Debt Securities
Corporate
debt securities are subject to the risk of the issuer’s inability to
meet
principal and interest payments on the obligation and may also be subject
to price volatility due to such factors as interest rate sensitivity,
market
perception of the creditworthiness of the issuer and general market liquidity.
When interest rates rise, the value of corporate debt securities can
be
expected to decline. Debt securities with longer maturities tend to be
more
sensitive to interest rate movements than those with shorter maturities.
In addition, certain corporate debt securities may be highly customized
and as a result may be subject to, among others, liquidity and pricing
transparency risks.
High
Yield Securities and Distressed Companies
Securities
rated lower than Baa by Moody’s, or equivalently rated by S&P or
Fitch,
are sometimes referred to as “high yield securities” or “junk bonds.”
Issuers
of these securities may be distressed and undergoing restructuring, bankruptcy
or other proceedings in an attempt to avoid insolvency. Investing
in these securities involves special risks in addition to the risks associated
with investments in higher-rated fixed income securities. While offering
a greater potential opportunity for capital appreciation and higher yields,
high yield and distressed company securities typically entail greater
potential
price volatility and may be less liquid than higher-rated securities.
High
yield securities and debt securities of distressed companies may be regarded
as predominately speculative with respect to the issuer’s continuing
ability to meet principal and interest payments. They may also be
more susceptible to real or perceived adverse economic and competitive
industry
conditions than higher-rated securities. Certain Funds may invest in
securities
that are in default with respect to the payment of interest or repayment
of principal, or present an imminent risk of default with respect to
such payments. Issuers of securities in default may fail to resume
principal
or interest payments, in which case a Fund may lose its entire investment.
The
market values of high yield securities tend to reflect individual developments
of the issuer to a greater extent than do higher-quality securities,
which tend to react mainly to fluctuations in the general level of interest
rates. In addition, lower-quality debt securities tend to be more sensitive
to general economic conditions. Certain emerging market governments
that issue high yield securities in which a Fund may invest are among
the largest debtors to commercial banks, foreign governments and
supranational
organizations, such as the World Bank, and may not be able or willing
to make principal and/or interest payments as they come due.
Variable
and Floating Rate Securities
Variable
and floating rate securities are securities that pay interest at rates
that
adjust whenever a specified interest rate changes and/or that reset on
predetermined
dates (such as the last day of a month or a calendar quarter).
In addition to senior loans, variable- and floating-rate instruments
may
include, without limit, instruments such as catastrophe and other event-linked
bonds, bank capital securities, unsecured bank loans, corporate
bonds, money market instruments and certain types of mortgage-related
and other asset-backed securities. Certain Funds may invest in floating
rate debt instruments (“floaters”) and engage in credit spread trades.
A credit spread trade is an investment position relating to a difference
in the prices or interest rates of two bonds or other securities, in
which
the value of the investment position is determined by changes in the
difference
between the prices or interest rates as the case may be, of the respective
securities. Variable and floating rate securities generally are less
sensitive
to interest rate changes but may decline in value if their interest rates
do not rise as much, or as quickly, as interest rates in general. Conversely,
floating rate securities will not generally increase in value if interest
rates decline. Certain Funds may also invest in inverse floating rate
debt
instruments (“inverse floaters”). An inverse floater may exhibit greater
price
volatility than a fixed rate obligation of similar credit quality. Certain
Funds
may invest up to 5% of its total assets in any combination of mortgage-related
or other asset-backed IO, PO or inverse floater securities. Residual
interest bonds are a type of inverse floater.
Inflation-Indexed
Bonds
Inflation-indexed
bonds (other than municipal inflation-indexed bonds and certain
corporate inflation-indexed bonds, which are more fully described below)
are fixed income securities whose principal value is periodically adjusted
according to the rate of inflation. If the index measuring inflation
falls,
the principal value of inflation-indexed bonds (other than municipal
inflation-indexed
bonds and certain corporate inflation-indexed bonds) will be
adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted
for inflation) is guaranteed in the case of TIPS. For bonds that do not
provide a similar guarantee, the adjusted principal value of the bond
repaid
at maturity may be less than the original principal. TIPS may also be
divided
into individual zero-coupon instruments for each coupon or principal
payment (known as “iSTRIPS”). An iSTRIP of the principal component
of a TIPS issue will retain the embedded deflation floor that will allow
the holder of the security to receive the greater of the original principal
or inflation-adjusted principal value at maturity. iSTRIPS may be less
liquid than conventional TIPS because they are a small component of the
TIPS market.
Municipal
inflation-indexed securities are municipal bonds that pay coupons based
on a fixed rate plus CPI. With regard to municipal inflation-indexed
bonds
and certain corporate inflation-indexed bonds, the inflation adjustment
is typically reflected in the semi-annual coupon payment. As a result,
the principal value of municipal inflation-indexed bonds and such
October
30, 2020 PROSPECTUS37
corporate
inflation-indexed bonds does not adjust according to the rate of inflation.
At the same time, the value of municipal inflation-indexed securities
and such corporate inflation-indexed securities generally will not increase
if the rate of inflation decreases. Because municipal inflation-indexed
securities and corporate inflation-indexed securities are a small component
of the municipal bond and corporate bond markets, respectively,
they may be less liquid than conventional municipal and corporate
bonds.
The
value of inflation-indexed bonds is expected to change in response to
changes
in real interest rates. Real interest rates are tied to the relationship
between
nominal interest rates and the rate of inflation. If nominal interest
rates
increase at a faster rate than inflation, real interest rates may rise,
leading
to a decrease in value of inflation-indexed bonds. Any increase in the
principal amount of an inflation-indexed bond will be considered taxable
ordinary income, even though investors do not receive their principal
until maturity.
Event-Linked
Exposure
Each
Fund may obtain event-linked exposure by investing in “event-linked bonds”
or “event-linked swaps” or by implementing “event-linked strategies.”
Event-linked exposure results in gains or losses that typically are
contingent, or formulaically related to defined trigger events. Examples
of
trigger events include hurricanes, earthquakes, weather-related phenomena,
or statistics related to such events. Some event-linked bonds are
commonly referred to as “catastrophe bonds.” If a trigger event occurs,
a
Fund may lose a portion or its entire principal invested in the bond or
notional
amount on a swap. Event-linked exposure often provides for an extension
of maturity to process and audit loss claims where a trigger event has,
or possibly has, occurred. An extension of maturity may increase volatility.
Event-linked exposure may also expose a Fund to certain unanticipated
risks including counterparty risk, adverse regulatory or jurisdictional
interpretations, and adverse tax consequences. Event-linked exposures
may also be subject to liquidity risk.
Foreign
(Non-U.S.) Securities
The
PIMCO 0-5 Year High Yield Corporate Bond Index Exchange-Traded and
the PIMCO Investment Grade Corporate Bond Index Exchange-Traded
Funds may invest in securities and instruments that are economically
tied
to foreign (non-U.S.) countries. PIMCO generally considers an instrument
to be economically tied to a non-U.S. country if the issuer is a foreign
(non-U.S.) government (or any political subdivision, agency, authority
or instrumentality of such government), or if the issuer is organized
under the laws of a non-U.S. country. A Fund’s investments in foreign
(non-U.S.) securities may include American Depositary Receipts (“ADRs”),
European Depositary Receipts (“EDRs”), Global Depositary Receipts
(“GDRs”) and similar securities that represent interests in a non-U.S.
company’s securities that have been deposited with a bank or trust and
that trade on a U.S. exchange or over-the-counter. ADRs, EDRs and GDRs
may be less liquid or may trade at a different price than the underlying
securities of the issuer. In the case of money market instruments other
than commercial paper and certificates of deposit, such instruments will
be considered economically tied to a non-U.S. country if the issuer of
such
money market instrument is organized under the laws of a non-U.S.
country.
In the case of commercial paper and certificates of deposit, such instruments
will be considered economically tied to a non-U.S. country if the
“country of exposure” of such instrument is a non-U.S. country, as determined
by the criteria set forth below. With respect to derivative instruments,
PIMCO generally considers such instruments to be economically
tied to non-U.S. countries if the underlying assets are foreign currencies
(or baskets or indexes of such currencies), or instruments or securities
that are issued by foreign governments; or issuers organized under the
laws of a non-U.S. country (or if the underlying assets are money market
instruments other than commercial paper and certificates of deposit,
the issuer
of such money market instrument is organized under the laws of a non-U.S.
country or, in the case of underlying assets that are commercial paper or
certificates of deposit if the “country of exposure” of such money market
instrument is a non-U.S. country). A security’s “country of exposure”
is determined by PIMCO using certain factors provided by a third-party
analytical service provider. The factors are applied in order such that the
first factor to result in the assignment of a country determines the
“country
of exposure.” Both the factors and the order in which they are applied
may change in the discretion of PIMCO. The current factors, listed in the
order in which they are applied, are: (i) if an asset-backed or other
collateralized
security, the country in which the collateral backing the security
is located; (ii) the “country of risk” of the issuer; (iii) if the security is
guaranteed
by the government of a country (or any political subdivision, agency,
authority or instrumentality of such government), the country of the
government
or instrumentality providing the guarantee; (iv) the “country of risk” of
the issuer’s ultimate parent; or (v) the country where the issuer is
organized
or incorporated under the laws thereof. “Country of risk” is a separate
four-part test determined by the following factors, listed in order of
importance: (i) management location; (ii) country of primary listing; (iii)
sales or
revenue attributable to the country; and (iv) reporting currency of the
issuer. Further, where a derivative instrument is exposed to an index,
PIMCO
generally considers the derivative to be economically tied to each country
represented by the components of the underlying index pursuant to the
criteria set forth in the preceding sentence.
Investing
in foreign (non-U.S.) securities involves special risks and considerations
not typically associated with investing in U.S. securities. Investors
should consider carefully the substantial risks involved for Funds that
invest in securities issued by foreign companies and governments of foreign
countries. These risks include: differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation
or confiscatory taxation; adverse changes in investment or exchange
control regulations; market disruptions; the possibility of security
suspensions;
and political instability. Individual foreign (non-U.S.) economies
may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rates of inflation, capital
reinvestment, resources, self- sufficiency and balance of payments position.
Other countries’ financial infrastructure or settlement systems may be
less developed than those of the United States.The securities markets,
values
of securities, yields and risks associated with foreign (non-U.S.) securities
markets may change independently of each other. Also, foreign (non-U.S.)
securities and dividends and interest payable on those securities may
be subject to foreign taxes, including taxes withheld from payments on
38PROSPECTUS |
PIMCO ETF Trust
those
securities. Foreign (non-U.S.) securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater
price volatility. Investments in foreign (non-U.S.) securities may also
involve
higher custodial costs than domestic investments and additional transaction
costs with respect to foreign currency conversions. Changes in,
or
uncertainty concerning, foreign exchange rates also will affect the value
of
securities denominated or quoted in foreign currencies and in some cases
could lead
to uncertainty regarding the reliability of issuers’ financial reporting.
Certain
Funds also may invest in sovereign debt issued by governments, their
agencies or instrumentalities, or other government-related entities.
Holders
of sovereign debt may be requested to participate in the rescheduling
of such debt and to extend further loans to governmental entities.
In addition, there is no bankruptcy proceeding by which defaulted sovereign
debt may be collected.
■ |
Emerging
Market Securities.
The PIMCO 0-5 Year High Yield Corporate
Bond Index Exchange-Traded and PIMCO Investment Grade
Corporate Bond Index Exchange-Traded Funds may invest in
securities and instruments that are economically tied to developing
(or “emerging market”) countries. PIMCO generally considers
an instrument to be economically tied to an emerging market
country if: the issuer is organized under the laws of an emerging
market country; the currency of settlement of the security
is a currency of an emerging market country; the security is
guaranteed by the government of an emerging market country (or
any political subdivision, agency, authority or instrumentality
of
such government); for an asset-backed or other collateralized security,
the country in which the collateral backing the security is located
is an emerging market country; or the security’s “country of
exposure” is an emerging market country, as determined by the criteria
set forth below. With respect to derivative instruments, PIMCO
generally considers such instruments to be economically tied
to emerging market countries if the underlying assets are currencies
of emerging market countries (or baskets or indexes of such
currencies), or instruments or securities that are issued or guaranteed
by governments of emerging market countries or by entities
organized under the laws of emerging market countries or if
an instrument’s “country of exposure” is an emerging market country.
A security’s “country of exposure” is determined by PIMCO
using certain factors provided by a third-party analytical service
provider. The factors are applied in order such that the first
factor
to result in the assignment of a country determines the “country
of exposure.” Both the factors and the order in which they
are applied may change in the discretion of PIMCO. The current
factors, listed in the order in which they are applied, are: (i)
if an asset-backed or other collateralized security, the country
in
which the collateral backing the security is located; (ii) the
“country
of risk” of the issuer; (iii) if the security is guaranteed by
the
government of a country (or any political subdivision, agency,
authority
or instrumentality of such government), the country of the
government or instrumentality providing the guarantee; (iv) the
“country of risk” of the issuer’s ultimate parent; or (v) the country
where the issuer is organized or incorporated under the
|
|
laws
thereof. “Country of risk” is a separate four-part test determined
by the following factors, listed in order of importance: (i)
management location; (ii) country of primary listing; (iii) sales
or
revenue attributable to the country; and (iv) reporting currency
of
the issuer. PIMCO has broad discretion to identify countries that
it considers to qualify as emerging markets. In making investments
in emerging market securities, a Fund emphasizes those
countries with relatively low gross national product per capita
and with the potential for rapid economic growth. Emerging
market countries are generally located in Asia, Africa, the
Middle East, Latin America and Eastern Europe. PIMCO will select
the country and currency composition based on its evaluation
of relative interest rates, inflation rates, exchange rates,
monetary and fiscal policies, trade and current account balances,
legal and political developments and any other specific factors
it believes to be relevant. |
|
|
Investing
in emerging market securities imposes risks different from,
or greater than, risks of investing in domestic securities or in
foreign,
developed countries. These risks include: smaller market capitalization
of securities markets, which may suffer periods of relative
illiquidity; significant price volatility; restrictions on foreign
investment;
possible repatriation of investment income and capital.
In addition, foreign investors may be required to register the
proceeds of sales; future economic or political crises could lead
to price controls, forced mergers, expropriation or confiscatory
taxation, seizure, nationalization, or creation of government
monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar,
and devaluation may occur subsequent to investments in these
currencies by a Fund. Many emerging market countries have experienced
substantial, and in some periods extremely high, rates
of inflation for many years. Inflation and rapid fluctuations in
inflation
rates have had, and may continue to have, negative effects
on the economies and securities markets of certain emerging
market countries. Additional risks of emerging market securities
may include: greater social, economic and political uncertainty
and instability; more substantial governmental involvement
in the economy; less governmental supervision and regulation;
unavailability of currency hedging techniques; companies
that are newly organized and small; differences in auditing
and financial reporting standards, which may result in unavailability
of material information about issuers; and less developed
legal systems. In addition, emerging securities markets may
have different clearance and settlement procedures, which may
be unable to keep pace with the volume of securities transactions
or otherwise make it difficult to engage in such transactions.
Settlement problems may cause a Fund to miss attractive
investment opportunities, hold a portion of its assets in cash
pending investment, or be delayed in disposing of a portfolio security.
Such a delay could result in possible liability to a purchaser
of the security. |
October
30, 2020 PROSPECTUS39
Foreign
(Non-U.S.) Currencies
Direct
investments in foreign (non-U.S.) currencies or in securities that trade
in,
or receive revenues in, foreign (non-U.S.) currencies will be subject to
currency
risk. Foreign currency exchange rates may fluctuate significantly over
short periods of time. They generally are determined by supply and demand
in the foreign exchange markets and the relative merits of investments
in different countries, actual or perceived changes in interest rates
and other complex factors. Currency exchange rates also can be affected
unpredictably by intervention (or the failure to intervene) by U.S. or
foreign
(non-U.S.) governments or central banks, or by currency controls or
political
developments. Currencies in which the Funds’ assets are denominated
may be devalued against the U.S. dollar, resulting in a loss to the
Funds.
■ |
Foreign
Currency Transactions.
Funds that invest in securities denominated
in foreign (non-U.S.) currencies may engage in foreign
currency transactions on a spot (cash) basis, enter into forward
foreign currency exchange contracts and invest in foreign currency
futures contracts and options on foreign currencies and futures.
A forward foreign currency exchange contract, which involves
an obligation to purchase or sell a specific currency at a future
date at a price set at the time of the contract, reduces a Fund’s
exposure to changes in the value of the currency it will deliver
and increases its exposure to changes in the value of the currency
it will receive for the duration of the contract. Certain foreign
currency transactions may also be settled in cash rather than
the actual delivery of the relevant currency. The effect on the
value
of a Fund is similar to selling securities denominated in one currency
and purchasing securities denominated in another currency.
Foreign currency transactions, like currency exchange rates,
can be affected unpredictably by intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, or
by
currency controls or political developments. Such events may prevent
or restrict a Fund’s ability to enter into foreign currency transactions,
force the Fund to exit a foreign currency transaction at
a disadvantageous time or price or result in penalties for the
Fund,
any of which may result in a loss to the Fund. A contract to sell
a foreign currency would limit any potential gain that might be
realized if the value of the hedged currency increases. A Fund
may
enter into these contracts to hedge against foreign exchange risk,
to increase exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one currency to another.
Suitable hedging transactions may not be available in all circumstances
and there can be no assurance that a Fund will engage
in such transactions at any given time or from time to time.
Also, such transactions may not be successful and may eliminate
any chance for a Fund to benefit from favorable fluctuations
in relevant foreign currencies. A Fund may use one currency
(or a basket of currencies) to hedge against adverse changes
in the value of another currency (or a basket of currencies)
when exchange rates between the two currencies are positively
correlated. A Fund will segregate or “earmark” assets determined
to be liquid by PIMCO in accordance with the procedures
established by the Board of Trustees (or, as permitted
|
|
by
applicable law, enter into certain offsetting positions) to cover
its
obligations under forward foreign currency exchange
contracts. |
■ |
Redenomination.
Continuing uncertainty as to the status of the euro
and the European Monetary Union (the “EMU”) has created significant
volatility in currency and financial markets generally. Any
partial or complete dissolution of the EMU could have significant
adverse effects on currency and financial markets and on
the values of a Fund’s portfolio investments. If one or more EMU
countries were to stop using the euro as its primary currency,
a Fund’s investments in such countries may be redenominated
into a different or newly adopted currency. As a result,
the value of those investments could decline significantly and
unpredictably. In addition, securities or other investments that
are
redenominated may be subject to currency risk, liquidity risk and
risk of improper valuation to a greater extent than similar investments
currently denominated in euros. To the extent a currency
used for redenomination purposes is not specified in respect
of certain EMU-related investments, or should the euro cease
to be used entirely, the currency in which such investments are
denominated may be unclear, making such investments particularly
difficult to value or dispose of. A Fund may incur additional
expenses to the extent it is required to seek judicial or other
clarification of the denomination or value of such
securities. |
There
can be no assurance that if a Fund earns income or capital gains in a
non-U.S.
country or PIMCO otherwise seeks to withdraw the Fund’s investments
from a given country, capital controls imposed by such country will
not prevent, or cause significant expense in, doing so.
Repurchase
Agreements
Each
Fund may enter into repurchase agreements, in which the Fund purchases
a security from a bank or broker-dealer, that agrees to repurchase
the security at the Fund’s cost plus interest within a specified time.
If the party agreeing to repurchase should default, the Fund will seek
to
sell the securities which it holds. This could involve procedural costs or
delays
in addition to a loss on the securities if their value should fall below
their
repurchase price.
Reverse
Repurchase Agreements, Dollar Rolls and Other Borrowings
Each
Fund may enter into reverse repurchase agreements and dollar rolls, subject
to the Fund’s limitations on borrowings. A reverse repurchase agreement
involves the sale of a security by a Fund and its agreement to repurchase
the instrument at a specified time and price. A dollar roll is similar
except that the counterparty is not obligated to return the same securities
as those originally sold by the Fund but only securities that are “substantially
identical.” Reverse repurchase agreements and dollar rolls may
be considered borrowing for some purposes. A Fund will segregate or “earmark”
assets determined to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees to cover its obligations under
reverse repurchase agreements and dollar rolls. Reverse repurchase agreements,
dollar rolls and other forms of borrowings may create leveraging
risk for a Fund.
40PROSPECTUS |
PIMCO ETF Trust
Each
Fund may borrow money to the extent permitted under the 1940 Act. This
means that, in general, a Fund may borrow money from banks for any purpose
in an amount up to 1/3 of the Fund’s total assets, less all liabilities
and
indebtedness not represented by senior securities. A Fund may also borrow
money for temporary administrative purposes in an amount not to exceed
5% of the Fund’s total assets. In addition, a Fund may borrow from certain
other PIMCO funds in inter-fund lending transactions to the extent permitted
by an exemptive order from the SEC.
Derivatives
Each
Fund may, but is not required to, use derivative instruments for risk
management
purposes or as part of its investment strategies. Generally, derivatives
are financial contracts whose value depends upon, or is derived from,
the value of an underlying asset, reference rate or index, and may relate
to stocks, bonds, interest rates, spreads between different interest
rates,
currencies or currency exchange rates, commodities, and related
indexes.
Examples of derivative instruments include options contracts, futures
contracts, options on futures contracts and swap agreements (including,
but not limited to, credit default swaps and swaps on ETFs). Each
Fund may invest some or all of its assets in derivative instruments,
subject
to the Fund’s objective and policies. A portfolio manager may decide
not to employ any of these strategies and there is no assurance that
any
derivatives strategy used by a Fund will succeed. A description of these
and
other derivative instruments that the Funds may use are described under
“Investment Objectives and Policies” in the SAI.
A
Fund’s use of derivative instruments involves risks different from, or
possibly
greater than, the risks associated with investing directly in securities
and other more traditional investments. Certain derivative transactions
may have a leveraging effect on a Fund. For example, a small investment
in a derivative instrument may have a significant impact on a Fund’s
exposure to interest rates, currency exchange rates or other investments.
As a result, a relatively small price movement in a derivative instrument
may cause an immediate and substantial loss or gain. A Fund may
engage in such transactions regardless of whether the Fund owns the asset,
instrument or components of the index underlying the derivative instrument.
A Fund may invest a significant portion of its assets in these types
of instruments. If it does, the Fund’s investment exposure could far
exceed
the value of its portfolio securities and its investment performance
could
be primarily dependent upon securities it does not own. A description
of
various risks associated with particular derivative instruments is included
in
“Investment Objectives and Policies” in the SAI. The following provides a
more
general discussion of important risk factors relating to all derivative
instruments
that may be used by the Funds.
CPI
Swap.
A CPI swap is a fixed maturity, over-the-counter derivative transaction
in which the investor receives the “realized” rate of inflation as measured
by the CPI over the life of the swap. The investor in turn pays a fixed
annualized rate over the life of the swap. This fixed rate is often referred
to as the “breakeven inflation” rate and is generally representative
of
the difference between treasury yields and TIPS yields of similar maturities
at the initiation of the swap. CPI swaps are typically in “bullet” format,
where all cash flows are exchanged at maturity. In addition to counterparty
risk, CPI swaps are also subject to inflation risk, where the swap
can potentially lose value if the realized rate of inflation over the life
of the
swap is less than the fixed market implied inflation rate (fixed breakeven
rate) that the investor agrees to pay at the initiation of the
swap.
Management
Risk.
Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated
with stocks and bonds. The use of a derivative requires an understanding
not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative
under all possible market conditions.
Credit
Risk.
The use of certain derivative instruments involves the risk that a
loss
may be sustained as a result of the failure of another party to the contract
(usually referred to as a “counterparty”) to make required payments
or otherwise comply with the contract’s terms. Additionally, a short
position in a credit default swap could result in losses if the Fund does
not
correctly evaluate the creditworthiness of the company on which the credit
default swap is based.
Liquidity
Risk.
Liquidity risk exists when a particular derivative instrument is difficult
to purchase or sell. If a derivative transaction is particularly large or
if
the relevant market is illiquid (as is the case with many privately negotiated
derivatives), it may not be possible to initiate a transaction or liquidate
a position at an advantageous time or price.
Leverage
Risk.
Because many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, reference rate
or
index could result in a loss substantially greater than the amount invested
in the derivative itself. Certain derivatives have the potential for
unlimited
loss, regardless of the size of the initial investment. When a Fund uses
derivatives for leverage, investments in that Fund will tend to be more
volatile,
resulting in larger gains or losses in response to market changes. To
limit leverage risk, each Fund will segregate or “earmark” assets
determined to be liquid by PIMCO in accordance with procedures established
by the Board of Trustees (or, as permitted by applicable regulation,
enter into certain offsetting positions) to cover its obligations under
derivative instruments.
Lack
of Availability.
Because the markets for certain derivative instruments (including
markets located in foreign countries) are relatively new and still developing,
suitable derivatives transactions may not be available in all circumstances
for risk management or other purposes. Upon the expiration of
a particular contract, a portfolio manager may wish to retain a Fund’s
position
in the derivative instrument by entering into a similar contract, but
may
be unable to do so if the counterparty to the original contract is unwilling
to enter into the new contract and no other suitable counterparty can
be found. There is no assurance that a Fund will engage in derivatives
transactions
at any time or from time to time. A Fund’s ability to use derivatives
may also be limited by certain regulatory and tax considerations.
Correlation
Risk.
In certain cases, the value of derivatives may not correlate perfectly,
or at all, with the value of the assets, reference rates or indexes they
are designed to closely track. For example, a swap agreement on an ETF
would not correlate perfectly with the index upon which the ETF is
based
because the fund’s return is net of fees and expenses. In this regard,
a
Fund may seek to achieve its investment objective, in part, by investing in
derivatives
positions that are designed to closely track the performance (or inverse
performance) of an index on a daily basis. However, the overall
October
30, 2020 PROSPECTUS41
investment
strategies of the Fund are not designed or expected to produce returns
which replicate the performance (or inverse performance) of the particular
index, and the degree of variation could be substantial, particularly
over longer periods. There are a number of factors which may prevent a
Fund, or derivatives or other strategies used by a Fund, from achieving
a desired correlation (or inverse correlation) with an index. These may
include, but are not limited to: (i) the impact of fund fees, expenses
and
transaction costs, including borrowing and brokerage costs/bid-ask spreads,
which are not reflected in index returns; (ii) differences in the timing of
daily calculations of the value of an index and the timing of the valuation
of derivatives, securities and other assets held by a Fund and the determination
of the NAV of Fund shares; (iii) disruptions or illiquidity in the
markets
for derivative instruments or securities in which a Fund invests; (iv)
a Fund
having exposure to or holding less than all of the securities in the
underlying
index and/or having exposure to or holding securities not included
in the underlying index; (v) large or unexpected movements of assets
into and out of a Fund (due to share purchases or redemptions, for example),
potentially resulting in the Fund being over- or under-exposed to the index;
(vi) the impact of accounting standards or changes thereto; (vii) changes to
the applicable index that are not disseminated in advance; (viii) a possible
need to conform a Fund’s portfolio holdings to comply with investment
restrictions or policies or regulatory or tax law requirements; and (ix)
fluctuations in currency exchange rates.
Market
and Other Risks.
Like most other investments, derivative instruments
are subject to the risk that the market value of the instrument will
change in a way detrimental to a Fund’s interest. If a portfolio manager
incorrectly
forecasts the values of securities, currencies or interest rates or other
economic factors in using derivatives for a Fund, the Fund might have
been
in a better position if it had not entered into the transaction at all.
While
some strategies involving derivative instruments can reduce the risk
of
loss, they can also reduce the opportunity for gain or even result in losses
by
offsetting favorable price movements in other Fund investments. A Fund
may
also have to buy or sell a security at a disadvantageous time or price
because
the Fund is legally required to maintain offsetting positions or asset
coverage
in connection with certain derivatives transactions. The regulation of
the derivatives markets has increased over the past several years, and
additional
future regulation of the derivatives markets may make derivatives
more costly, may limit the availability or reduce the liquidity of derivatives,
or may otherwise adversely affect the value or performance of derivatives.
Any such adverse future developments could impair the effectiveness
or raise the costs of a Fund’s derivative transactions, or impede
the employment of a Fund’s derivatives strategies, or adversely affect
a Fund’s performance.
Other
risks in using derivatives include the risk of mispricing and improper
valuation
of derivatives. Many derivatives, in particular privately negotiated
derivatives,
are complex and often valued subjectively. Improper valuations can
result in increased cash payment requirements to counterparties or a
loss
of value to a Fund. Also, the value of derivatives may not correlate
perfectly,
or at all, with the value of the assets, reference rates or indexes they
are designed to closely track. For example, a swap agreement on an exchange-traded
fund would not correlate perfectly with the index upon which
the exchange-traded fund is based because the fund’s return is net of
fees and expenses. In addition, a Fund’s use of derivatives may cause the
Fund to
realize higher amounts of short-term capital gains (generally taxed at
ordinary income tax rates) than if the Fund had not used such instruments.
Delayed
Funding Loans and Revolving Credit Facilities
Each
Fund may also enter into, or acquire participations in, delayed funding
loans
and revolving credit facilities, in which a lender agrees to make loans
up
to a maximum amount upon demand by the borrower during a specified term.
These commitments may have the effect of requiring a Fund to increase
its investment in a company at a time when it might not otherwise decide
to do so (including at a time when the company’s financial condition
makes
it unlikely that such amounts will be repaid). To the extent that a Fund
is committed to advance additional funds, it will segregate or “earmark”
assets determined to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees in an amount sufficient to meet
such commitments. Delayed funding loans and revolving credit facilities
are subject to credit, interest rate and liquidity risk and the risks of
being
a lender.
When-Issued,
Delayed Delivery and Forward Commitment Transactions
Each
Fund may purchase or sell securities which it is eligible to purchase or
sell
on a when-issued basis, may purchase and sell such securities for delayed
delivery and may make contracts to purchase or sell such securities for
a fixed price at a future date beyond normal settlement time (forward
commitments).
When-issued transactions, delayed delivery purchases and forward
commitments involve a risk of loss if the value of the securities declines
prior to the settlement date. This risk is in addition to the risk that
a
Fund’s other assets will decline in value. Therefore, these transactions
may
result in a form of leverage and increase a Fund’s overall investment
exposure.
Typically, no income accrues on securities a Fund has committed to
purchase prior to the time delivery of the securities is made, although a
Fund
may earn income on securities it has segregated or “earmarked” to cover
these positions. When a Fund has sold a security on a when-issued, delayed
delivery, or forward commitment basis, the Fund does not participate
in future gains or losses with respect to the security. If the other
party
to a transaction fails to pay for the securities, a Fund could suffer a
loss.
Additionally, when selling a security on a when-issued, delayed delivery
or forward commitment basis without owning the security, a Fund will
incur a loss if the security’s price appreciates in value such that the
security’s
price is above the agreed-upon price on the settlement date.
Investment
in Other Investment Companies
Each
Fund may invest in securities of other investment companies, such as
open-end
or closed-end management investment companies, including ETFs
or in pooled accounts, or other unregistered accounts or investment
vehicles to the extent permitted by the 1940 Act and the rules and
regulations thereunder and any exemptive relief therefrom. A Fund may
invest in other investment companies to gain broad market or sector exposure,
including during periods when it has large amounts of uninvested cash
or when PIMCO believes share prices of other investment companies offer
attractive values. As a shareholder of an investment company or other
pooled
vehicle, a Fund may indirectly bear investment advisory fees,
42PROSPECTUS |
PIMCO ETF Trust
supervisory
and administrative fees, service fees and other fees which are in addition
to the fees the Fund pays its service providers.
Subject
to the restrictions and limitations of the 1940 Act, and the rules and
regulations thereunder and any exemptive relief therefrom, each Fund
may,
in the future, elect to pursue its investment objective either by investing
directly in securities, or by investing in one or more underlying investment
vehicles or companies that have substantially similar investment objectives
and policies as the Fund.
Illiquid
Investments
Each
Fund may invest up to 15% of its net assets (taken at the time of investment)
in illiquid investments that are assets. Certain illiquid investments
may require pricing at fair value as determined in good faith
under the supervision of the Board of Trustees. A portfolio manager may
be subject to significant delays in disposing of illiquid investments, and
transactions
in illiquid investments may entail registration expenses and other
transaction costs that are higher than those for transactions in liquid
investments.
The term “illiquid investments” for this purpose means investments
that a Fund reasonably expects cannot be sold or disposed of in
current market conditions in seven calendar days or less without the sale
or
disposition significantly changing the market value of the investment.
Restricted
securities, i.e.,
securities subject to legal or contractual restrictions
on resale, may be illiquid. However, some restricted securities (such
as securities issued pursuant to Rule 144A under the Securities Act of
1933,
as amended, and certain commercial paper) may be treated as liquid (i.e.,
classified by the Fund in a liquidity category other than “illiquid”
pursuant
to the Fund’s liquidity risk management procedures), although they
may be relatively less liquid than registered securities traded on established
secondary markets. Additional discussion of illiquid investments and
related regulatory limits and requirements is available under “Investment
Objectives and Policies” in the SAI.
Loans
of Portfolio Securities
For
the purpose of achieving income, each Fund may lend its portfolio securities
to brokers, dealers, and other financial institutions provided a number
of conditions are satisfied, including that the loan is fully collateralized.
Please see “Investment Objectives and Policies” in the SAI for
details. When a Fund lends portfolio securities, its investment performance
will continue to reflect changes in the value of the securities loaned,
and the Fund will also receive a fee or interest on the collateral. Securities
lending involves the risk of loss of rights in the collateral or delay
in
recovery of the collateral if the borrower fails to return the security loaned
or
becomes insolvent. A Fund may pay lending fees to a party arranging the
loan,
which may be an affiliate of the Fund. Cash collateral received by a
Fund
in securities lending transactions may be invested in short-term liquid
fixed
income instruments or in money market or short-term mutual funds, or
similar investment vehicles, including affiliated money market or
short-term
mutual funds. A Fund bears the risk of such investments.
Portfolio
Turnover
The
length of time a Fund has held a particular security is not generally a
consideration
in investment decisions. A change in the securities held by a Fund
is known as “portfolio turnover.” When a portfolio manager deems it
appropriate,
and particularly during periods of volatile market movements, a Fund may
engage in frequent and active trading of portfolio securities to achieve
its investment objective, including, without limitation, to reflect changes in
a Fund’s Underlying Index, such as reconstitutions, additions or deletions
of component securities. To the extent that Creation Unit purchases
from and redemptions by a Fund are effected in cash, frequent purchases
and redemptions may increase the rate of portfolio turnover. Higher
portfolio turnover (e.g., an
annual rate greater than 100% of the average
value of a Fund’s portfolio) involves correspondingly greater expenses
to a Fund, including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestments in other
securities. Such sales may also result in realization of taxable capital
gains,
including short-term capital gains (which are generally taxed at ordinary
income tax rates). The trading costs and tax effects associated with
portfolio
turnover may adversely affect a Fund’s performance. Please see a Fund’s
“Fund Summary—Portfolio Turnover” or the “Financial Highlights” in this
prospectus for the portfolio turnover rates of the Funds that were operational
during the last fiscal year. In addition, large movements of cash into or
out of a Fund may negatively impact the Fund’s ability to achieve its
investment
objective or maintain a consistent level of operating expenses.
Changes
in Investment Objectives and Policies
The
investment objective of each
Fund is non-fundamental and may be changed
by the Board of Trustees without shareholder approval. Unless otherwise
stated, all other investment policies of the Funds
may be changed
by the Board of Trustees without shareholder approval. In addition,
the Trust may determine to cease operating any Fund as an “exchange-traded”
fund and cause the Fund’s shares to stop trading on a securities
exchange.
Percentage
Investment Limitations
Unless
otherwise stated, all percentage limitations on Fund investments listed
in this prospectus will apply at the time of investment. A Fund would
not
violate these limitations unless an excess or deficiency occurs or exists
immediately
after and as a result of an investment. Each Fund has adopted a
non-fundamental investment policy to invest at least 80% of its assets in
investments
suggested by its name. For purposes of this policy, the term “assets”
means net assets plus the amount of any borrowings for investment
purposes.
Credit
Ratings and Unrated Securities
Rating
agencies are private services that provide ratings of the credit quality
of
fixed income securities, including convertible securities. Appendix A to
this
prospectus describes the various ratings assigned to fixed income securities
by Moody’s, S&P and Fitch. Ratings assigned by a rating agency
are
not absolute standards of credit quality and do not evaluate market risks.
Rating agencies may fail to make timely changes in credit ratings and
an
issuer’s current financial condition may be better or worse than a rating
indicates.
A Fund will not necessarily sell a security when its rating is reduced
below its rating at the time of purchase. The ratings of a fixed income
security may change over time. Moody’s, S&P and Fitch monitor and
evaluate the ratings assigned to securities on an ongoing basis. As a
result,
debt instruments held by a Fund could receive a higher rating or a lower
rating during the period in which they are held by a Fund. PIMCO
October
30, 2020 PROSPECTUS43
does not
rely solely on credit ratings, and develops its own analysis of issuer
credit
quality.
A
Fund may purchase unrated securities (which are not rated by a rating
agency)
if PIMCO determines, in its sole discretion, that the security is of
comparable
quality to a rated security that the Fund may purchase. In making
ratings determinations, PIMCO may take into account different factors
than those taken into account by rating agencies, and PIMCO’s rating
of a security may differ from the rating that a rating agency may have
given
the same security. Unrated securities may be less liquid than comparable
rated securities and involve the risk that the portfolio manager may
not accurately evaluate the security’s comparative credit rating. Analysis
of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher-quality fixed income securities. To
the
extent that a Fund invests in high yield and/or unrated securities, the
Fund’s
success in achieving its investment objective may depend more heavily
on the portfolio manager’s creditworthiness analysis than if the Fund
invested exclusively in higher-quality and rated securities.
Other
Investments and Techniques
The
Funds may invest in other types of securities and use a variety of investment
techniques and strategies that are not described in this prospectus.
These securities and techniques may subject the Funds to additional
risks. Please see the SAI for additional information about the securities
and investment techniques described in this prospectus and about additional
securities and techniques that may be used by the Funds.
Cyber
Security
As
the use of technology has become more prevalent in the course of business,
the Funds have become potentially more susceptible to operational
and information security risks resulting from breaches in cyber security.
A breach in cyber security refers to both intentional and unintentional
cyber events that may, among other things, cause a Fund to lose
proprietary information, suffer data corruption and/or destruction or
lose
operational capacity, result in the unauthorized release or other misuse
of
confidential information, or otherwise disrupt normal business operations.
Cyber security breaches may involve unauthorized access to a Fund’s
digital information systems (e.g.,
through “hacking” or malicious software
coding), but may also result from outside attacks such as denial-of-service
attacks (i.e.,
efforts to make network services unavailable to intended
users). In addition, cyber security breaches involving a Fund’s third
party
service providers (including but not limited to advisers, sub-advisers,
administrators,
transfer agents, custodians, distributors and other third parties),
trading counterparties or issuers in which a Fund invests can also subject
a Fund to many of the same risks associated with direct cyber security
breaches. Moreover, cyber security breaches involving trading counterparties
or issuers in which a Fund invests could adversely impact such
counterparties or issuers and cause the Fund’s investment to lose value.
Cyber
security failures or breaches may result in financial losses to a Fund
and
its shareholders. These failures or breaches may also result in disruptions
to business operations, potentially resulting in financial losses; interference
with a Fund’s ability to calculate its NAV, process shareholder transactions
or otherwise transact business with shareholders; impediments
to
trading; violations of applicable privacy and other laws; regulatory fines;
penalties;
reputational damage; reimbursement or other compensation costs;
additional compliance and cyber security risk management costs and other
adverse consequences. In addition, substantial costs may be incurred
in order
to prevent any cyber incidents in the future.
Like
with operational risk in general, the Funds have established business
continuity
plans and risk management systems designed to reduce the risks associated
with cyber security. However, there are inherent limitations in these
plans and systems, including that certain risks may not have been identified,
in large part because different or unknown threats may emerge in
the future. As such, there is no guarantee that such efforts will succeed,
especially
because the Funds do not directly control the cyber security systems
of issuers in which a Fund may invest, trading counterparties or third
party service providers to the Funds. There is also a risk that cyber
security
breaches may not be detected. The Funds and their shareholders could
be negatively impacted as a result.
Underlying
Indexes
“ICE
BofA” and “ICE BofA Long US Treasury Principal STRIPS Index,” “ICE
BofA
US Inflation-Linked Treasury Index,” “ICE BofA 1-5 Year US
Inflation-Linked
Treasury Index,” “ICE BofA 15+ Year US Inflation-Linked Treasury Index,”
“ICE BofA 0-5 Year US High Yield Constrained Index” and “ICE BofA
US Corporate Index” (collectively, the “ICE BofA Indexes”) are reprinted
with permission. ©
Copyright 2017 Merrill Lynch, Pierce, Fenner & Smith
Incorporated (“ICE BofA”). All rights reserved. “ICE BofA” and the ICE
BofA Indexes are service marks of ICE BofA and/or its affiliates and
have
been licensed for use for certain purposes by PIMCO on behalf of the
Funds
that are based on the ICE BofA Indexes, and are not issued, sponsored,
endorsed or promoted by ICE BofA and/or ICE BofA’s affiliates nor
is ICE BofA and/or ICE BofA’s affiliates an adviser to the Funds. ICE
BofA
and ICE BofA’s affiliates make no representation, express or implied,
regarding
the advisability of investing in the Funds or the ICE BofA Indexes and
do not guarantee the quality, accuracy or completeness of the ICE BofA
Indexes,
index values or any index related data included herein, provided herewith
or derived therefrom and assume no liability in connection with their
use. As the index provider, ICE BofA is licensing certain trademarks,
the
ICE BofA Indexes and trade names which are composed by ICE BofA without
regard to PIMCO, the Funds or any investor. ICE BofA and ICE BofA’s
affiliates do not provide investment advice to PIMCO or the Funds and
are not responsible for the performance of the Funds. ICE BofA compiles
and publishes the ICE BofA Indexes. PIMCO has entered into a license
agreement with ICE BofA to use each Underlying Index.
Disclaimers
There
is no guarantee that ICE BofA will permit PIMCO to use each Underlying
Index beyond the term of the current license agreement. In the event
that ICE BofA terminates or chooses not to renew the license agreement,
each Fund will cease use of its Underlying Index and will seek to
achieve its investment objective by investing in the component securities
of
a comparable index. Neither the Trust, the Funds, PIMCO nor the
Distributor guarantees
the accuracy or the completeness of the ICE BofA Indexes
or any data included therein and neither the Trust, the Funds,
44PROSPECTUS |
PIMCO ETF Trust
PIMCO
nor the Distributor shall have liability for any errors, omissions or
interruptions
therein.
The
Trust, the Funds, PIMCO and the Distributor make no warranty, express
or
implied, to the owners of shares of the Funds or to any other person or
entity,
as to results to be obtained by the Funds from the use of the ICE BofA
Indexes or any data included therein. The Trust, the Funds, PIMCO and the
Distributor make no express or implied warranties and expressly
disclaim
all warranties of merchantability or fitness for a particular purpose
or
use with respect to the ICE BofA Indexes or any data included therein.
Without
limiting any of the foregoing, in no event shall the Trust, the Funds,
PIMCO or the Distributor have any liability for any special, punitive,
direct,
indirect or consequential damages (including lost profits), even if notified
of the possibility of such damages.
The
Funds are not issued, sponsored, endorsed or promoted by ICE BofA, any
affiliate of ICE BofA or any other party involved in, or related to,
making
or compiling the ICE BofA Indexes. The ICE BofA Indexes are the
exclusive
property of ICE BofA and/or its affiliates. “ICE BofA” and “ICE
BofA
Long US Treasury Principal STRIPS Index,” “ICE BofA US
Inflation-Linked
Treasury Index,” “ICE BofA 1-5 Year US Inflation-Linked Treasury Index,”
“ICE BofA 15+ Year US Inflation-Linked Treasury Index,” “ICE BofA
0-5 Year US High Yield Constrained Index” and “ICE BofA US Corporate
Index” (the “ICE BofA Indexes”) are reprinted with permission. ©
Copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated. The
ICE
BofA Indexes are service marks of ICE BofA and/ or its affiliates and
have
been licensed for use for certain purposes by PIMCO on behalf of the
Funds.
Neither ICE BofA, any affiliate of ICE BofA nor any other party involved
in, or related to, making or compiling the ICE BofA Indexes makes any
representation or warranty, express or implied, to the shareholders of
the
Funds or any member of the public regarding the advisability of investing
in securities generally or in the Funds particularly or the ability of
the
ICE BofA Indexes to track the corresponding market performance. ICE BofA
is the licensor of certain trademarks, trade names and service marks
of
ICE BofA and/or its affiliates and of the ICE BofA Indexes, which are
determined,
composed and calculated by ICE BofA and/or its affiliates without
regard to PIMCO, the Funds or the shareholders of the Funds. Neither
ICE BofA, any affiliate of ICE BofA nor any other party involved in,
or
related to, making or compiling the ICE BofA Indexes has any obligation
to
take the needs of PIMCO, the Funds or the shareholders of the Funds into
consideration in determining, composing or calculating the ICE BofA Indexes.
None of ICE BofA or any of its affiliates have the obligation to continue
to provide the ICE BofA Indexes to PIMCO or the Funds beyond the
applicable license term. Neither ICE BofA, any affiliate of ICE BofA nor
any
other party involved in, or related to, making or compiling the ICE BofA
Indexes
is responsible for or has participated in the determination of the timing,
pricing, or quantities of the Funds to be issued or in the determination
or calculation of the equation by which the Funds are to be redeemable.
Neither ICE BofA, any affiliate of ICE BofA nor any other party involved
in, or related to, making or compiling the ICE BofA Indexes has any
obligation or liability in connection with the administration, marketing
or
trading of the Funds. ICE BofA and its affiliates do not provide investment
advice to PIMCO or the Funds and are not responsible for the performance
of the Funds.
NEITHER
ICE BofA, ANY AFFILIATE OF ICE BofA NOR ANY OTHER PARTY INVOLVED
IN, OR RELATED TO, MAKING OR COMPILING THE ICE BofA INDEXES
WARRANTS OR GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS
OF THE ICE BofA INDEXES OR ANY DATA INCLUDED THEREIN
AND/OR PROVIDED THEREWITH AND SHALL HAVE NO LIABILITY FOR
ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. NEITHER ICE
BofA, ANY AFFILIATE OF ICE BofA NOR ANY OTHER PARTY INVOLVED IN,
OR RELATED TO, MAKING OR COMPILING THE ICE BofA INDEXES MAKES
ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED
BY PIMCO, THE FUNDS, SHAREHOLDERS OF THE FUNDS, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE ICE BofA INDEXES
OR ANY DATA INCLUDED THEREIN. NEITHER ICE BofA, ANY AFFILIATE
OF ICE BofA NOR ANY OTHER PARTY INVOLVED IN, OR RELATED
TO, MAKING OR COMPILING THE ICE BofA INDEXES MAKES ANY
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE ICE BofA INDEXES OR ANY DATA
INCLUDED THEREIN AND/OR PROVIDED THEREWITH. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL ICE BofA, ANY AFFILIATE
OF ICE BofA OR ANY OTHER PARTY INVOLVED IN, OR RELATED TO,
MAKING OR COMPILING THE ICE BofA INDEXES HAVE ANY LIABILITY FOR
DIRECT, INDIRECT, PUNITIVE, SPECIAL, CONSEQUENTIAL OR ANY OTHER
DAMAGES OR LOSSES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED
OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES
OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN ICE
BofA AND PIMCO.
No
purchaser, seller or holder of this security, or any other person or entity,
should
use or refer to any ICE BofA trade name, trademark or service mark to
sponsor, endorse, market or promote this product without first contacting
ICE BofA to determine whether ICE BofA’s permission is required.
Under no circumstances may any person or entity claim any affiliation
with ICE BofA without the written permission of ICE BofA.
Shares
of the Funds are not sponsored, endorsed or promoted by NYSE Arca.
NYSE Arca makes no representation or warranty, express or implied, to
the owners of shares of the Funds or any member of the public regarding
the
ability of the Funds to track the total return performance of an Underlying
Index or the ability of an Underlying Index to track fixed income performance.
NYSE Arca is not responsible for, nor has it participated in, the
determination of the compilation or the calculation of an Underlying
Index,
nor in the determination of the timing of, prices of or quantities of
shares
of the Funds to be issued, nor in the determination or calculation of
the
equation by which the shares are redeemable. NYSE Arca has no obligation
or liability to owners of shares of the Funds in connection with the
administration, marketing or trading of shares of the Funds. NYSE Arca
does
not guarantee the accuracy and/or the completeness of an Underlying Index
or any data included therein. NYSE Arca makes no warranty, express or
implied, as to results to be obtained by the Trust, on behalf of the Funds
as
licensee, licensee’s customers and counterparties, owners of shares of
the
Funds or any other person or entity, from the use of an Underlying Index
or any data included therein in connection with the rights licensed as
described
herein or for any other use.
October
30, 2020 PROSPECTUS45
NYSE
Arca makes no express or implied warranties and hereby expressly disclaims
all warranties of merchantability or fitness for a particular purpose
with
respect to an Underlying Index or any data included therein. Without
limiting
any of the foregoing, in no event shall NYSE Arca have any liability
for
any direct, indirect, special, punitive, consequential or any other damages
(including lost profits) even if notified of the possibility of such
damages.
46PROSPECTUS |
PIMCO ETF Trust
THIS
PAGE WAS INTENTIONALLY LEFT BLANK
October
30, 2020 PROSPECTUS47
Financial
Highlights
The
financial highlights table is intended to help a shareholder understand each
Fund’s financial performance for the last five fiscal years or, if shorter,
the period since a Fund commenced operations. Certain information reflects
financial results for a single Fund share. The total returns in the
table
represent the rate that an investor would have earned or lost on an investment
in shares of a Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with each Fund’s financial statements, are
included in the Trust’s annual report to shareholders. The annual report is
available free of charge by calling the Trust at the phone number on
the
back of this prospectus. The annual report is also available for download free
of charge on the Trust’s website at www.pimcoetfs.com. Note: All footnotes
to the financial highlights table appear at the end of the tables.
|
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Investment
Operations |
|
Less
Distributions(c)
|
Selected
Per Share Data for the Year
Endedˆ: |
Net
Asset Value Beginning
of Year(a)
|
Net
Investment Income
(Loss)(b)
|
Net
Realized/ Unrealized
Gain (Loss) |
Total |
|
From
Net Investment
Income |
From
Net Realized Capital
Gains |
Tax
Basis Return of
Capital |
Total |
PIMCO
25+ Year Zero Coupon U.S.
Treasury Index Exchange-Traded
Fund |
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06/30/2020
|
$ |
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$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
06/30/2019
|
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06/30/2018
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06/30/2017
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06/30/2016
|
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PIMCO
1-5 Year U.S. TIPS Index
Exchange-Traded Fund |
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06/30/2020
|
$ |
|
$ |
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$ |
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$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
06/30/2019
|
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06/30/2018
|
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06/30/2017
|
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06/30/2016
|
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PIMCO
15+ Year U.S. TIPS Index
Exchange-Traded Fund |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/2020
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
06/30/2019
|
|
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|
|
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06/30/2018
|
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06/30/2017
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06/30/2016
|
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PIMCO
Broad U.S. TIPS Index Exchange-Traded
Fund |
|
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|
|
|
|
06/30/2020
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
06/30/2019
|
|
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06/30/2018
|
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06/30/2017
|
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06/30/2016
|
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PIMCO
0-5 Year High Yield Corporate
Bond Index Exchange-Traded
Fund |
|
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|
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|
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|
|
|
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|
06/30/2020
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
06/30/2019
|
|
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06/30/2018
|
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06/30/2017
|
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06/30/2016
|
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|
PIMCO
Investment Grade Corporate
Bond Index Exchange-Traded
Fund |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/2020
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
06/30/2019
|
|
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|
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06/30/2018
|
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06/30/2017
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06/30/2016
|
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ˆ |
A
zero balance may reflect actual amounts rounding to less than $0.01 or
0.01%. |
(a) |
Includes
adjustments required by U.S. GAAP and may differ from net asset values and
performance reported elsewhere by the Funds. |
(b) |
Per
share amounts based on average number of shares outstanding during the
year. |
(c) |
The
tax characterization of distributions is determined in accordance with
Federal income tax regulations. See Note 2, Distributions to
Shareholders, in the Notes to Financial Statements for
more information. |
(d) |
Portfolio
turnover rate excludes securities received or delivered from in-kind
processing of creation or redemptions. |
48PROSPECTUS |
PIMCO ETF Trust
26101
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Ratios/Supplemental
Data |
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Ratios
to Average Net Assets |
|
Net
Asset Value End of
Year(a)
|
Total
Return(a)
|
Net
Assets End of Year
(000s) |
Expenses |
Expenses
Excluding Waivers |
Expenses
Excluding Interest
Expense |
Expenses
Excluding Interest
Expense and
Waivers |
Net
Investment Income
(Loss) |
Portfolio
Turnover Rate(d)
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October
30, 2020 PROSPECTUS49
Appendix
A
Description
of Securities Ratings
The
Fund‘s
investments may range in quality from securities rated in the lowest
category in which the Fund
is permitted to invest to securities rated in
the highest category (as rated by Moody’s, Standard & Poor’s or Fitch, or,
if
unrated, determined by PIMCO to be of comparable quality). The percentage
of the Fund‘s
assets invested in securities in a particular rating category
will vary. The following terms are generally used to describe the credit
quality of fixed income securities:
High
Quality Debt Securities
are those rated in one of the two highest rating
categories (the highest category for commercial paper) or, if unrated,
deemed
comparable by PIMCO.
Investment
Grade Debt Securities
are those rated in one of the four highest rating
categories, or if unrated deemed comparable by PIMCO.
Below
Investment Grade High Yield Securities (“Junk Bonds”),
are those rated
lower than Baa by Moody’s, BBB by Standard & Poor’s or Fitch, and
comparable
securities. They are deemed predominantly speculative with respect
to the issuer’s ability to repay principal and interest.
The
following is a description of Moody’s, Standard & Poor’s and Fitch’s
rating
categories applicable to fixed income securities.
Moody’s
Investors Service, Inc.
Global
Long-Term Rating Scale
Ratings
assigned on Moody’s global long-term rating scales are forward-looking
opinions of the relative credit risks of financial obligations issued by
non-financial
corporates, financial institutions, structured finance vehicles, project
finance vehicles, and public sector entities. Long-term ratings are assigned
to issuers or obligations with an original maturity of one year or more
and reflect both on the likelihood of a default or impairment on contractual
financial obligations and the expected financial loss suffered in the
event of default or impairment.
Aaa:
Obligations rated Aaa are judged to be of the highest quality, subject
to
the lowest level of credit risk.
Aa:
Obligations rated Aa are judged to be of high quality and are subject to
very
low credit risk.
A:
Obligations rated A are judged to be upper-medium grade and are subject
to low credit risk.
Baa:
Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
Ba:
Obligations rated Ba are judged to be speculative and are subject to
substantial
credit risk.
B:
Obligations rated B are considered speculative and are subject to high
credit
risk.
Caa:
Obligations rated Caa are judged to be speculative of poor standing and
are subject to very high credit risk.
Ca:
Obligations rated Ca are highly speculative and are likely in, or very
near,
default, with some prospect of recovery of principal and
interest.
C:
Obligations rated C are the lowest rated and are typically in default, with
little
prospect for recovery of principal or interest.
Moody’s
appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that generic rating category. Additionally, a “(hyb)”
indicator is appended to all ratings of hybrid securities issued by banks,
insurers, finance companies, and securities firms.*
*
By their terms, hybrid securities allow for the omission of scheduled
dividends,
interest, or principal payments, which can potentially result in
impairment
if such an omission occurs. Hybrid securities may also be subject
to contractually allowable write-downs of principal that could result
in
impairment. Together with the hybrid indicator, the long-term obligation
rating
assigned to a hybrid security is an expression of the relative credit risk
associated
with that security.
Medium-Term
Note Program Ratings
Moody’s
assigns provisional ratings to medium-term note (MTN) programs and
definitive ratings to the individual debt securities issued from them
(referred
to as drawdowns or notes).
MTN
program ratings are intended to reflect the ratings likely to be assigned
to drawdowns issued from the program with the specified priority of
claim (e.g.,
senior or subordinated). To capture the contingent nature of a
program rating, Moody’s assigns provisional ratings to MTN programs. A
provisional
rating is denoted by a (P) in front of the rating.
The
rating assigned to a drawdown from a rated MTN or bank/deposit note program
is definitive in nature, and may differ from the program rating if the
drawdown is exposed to additional credit risks besides the issuer’s default,
such as links to the defaults of other issuers, or has other structural
features
that warrant a different rating. In some circumstances, no rating may
be assigned to a drawdown.
Moody’s
encourages market participants to contact Moody’s Ratings Desks or
visit www.moodys.com directly if they have questions regarding ratings
for
specific notes issued under a medium-term note program. Unrated notes
issued under an MTN program may be assigned an NR (not rated) symbol.
Global
Short-Term Rating Scale
Ratings
assigned on Moody’s global short-term rating scales are forward-looking
opinions of the relative credit risks of financial obligations issued by
non-financial
corporates, financial institutions, structured finance vehicles, project
finance vehicles, and public sector entities. Short-term ratings are
assigned
to obligations with an original maturity of thirteen months or less and
reflect both on the likelihood of a default or impairment on contractual
financial
obligations and the expected financial loss suffered in the event of
default
or impairment.
Moody’s
employs the following designations to indicate the relative repayment
ability of rated issuers:
P-1:
Issuers (or supporting institutions) rated Prime-1 have a superior ability
to
repay short-term debt obligations.
October
30, 2020 PROSPECTUSA-1
P-2:
Issuers (or supporting institutions) rated Prime-2 have a strong ability
to
repay short-term debt obligations.
P-3:
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability
to repay short-term obligations.
NP:
Issuers (or supporting institutions) rated Not Prime do not fall within
any
of the Prime rating categories.
National
Scale Long-Term Ratings
Moody’s
long-term National Scale Ratings (NSRs) are opinions of the relative
creditworthiness of issuers and financial obligations within a particular
country. NSRs are not designed to be compared among countries; rather,
they address relative credit risk within a given country. Moody’s assigns
national scale ratings in certain local capital markets in which investors
have found the global rating scale provides inadequate differentiation
among credits or is inconsistent with a rating scale already in common
use in the country.
In
each specific country, the last two characters of the rating indicate the
country
in which the issuer is located (e.g.,
Aaa.br for Brazil).
Aaa.n:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness
relative to other domestic issuers.
Aa.n:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness
relative
to other domestic issuers.
A.n:
Issuers or issues rated A.n present above-average creditworthiness relative
to other domestic issuers.
Baa.n:
Issuers or issues rated Baa.n represent average creditworthiness relative
to other domestic issuers.
Ba.n:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness
relative to other domestic issuers.
B.n:
Issuers or issues rated B.n demonstrate weak creditworthiness relative
to
other domestic issuers.
Caa.n:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness
relative to other domestic issuers.
Ca.n:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness
relative to other domestic issuers.
C.n:
Issuers or issues rated C.n demonstrate the weakest creditworthiness
relative
to other domestic issuers.
Moody’s
appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that generic rating category. National scale long-term
ratings of D.ar and E.ar may also be applied to Argentine obligations.
National
Scale Short-Term Ratings
Moody’s
short-term NSRs are opinions of the ability of issuers in a given country,
relative to other domestic issuers, to repay debt obligations that have
an original maturity not exceeding thirteen months. Short-term NSRs in
one country should not be compared with short-term NSRs in another country,
or with Moody’s global ratings.
There
are four categories of short-term national scale ratings, generically
denoted
N-1 through N-4 as defined below.
In
each specific country, the first two letters indicate the country in which
the
issuer is located (e.g.,
BR-1 through BR-4 for Brazil).
N-1:
Issuers rated N-1 have the strongest ability to repay short-term senior
unsecured
debt obligations relative to other domestic issuers.
N-2:
Issuers rated N-2 have an above average ability to repay short-term senior
unsecured debt obligations relative to other domestic issuers.
N-3:
Issuers rated N-3 have an average ability to repay short-term senior
unsecured
debt obligations relative to other domestic issuers.
N-4:
Issuers rated N-4 have a below average ability to repay short-term senior
unsecured debt obligations relative to other domestic issuers.
The
short-term rating symbols P-1.za, P-2.za, P-3.za and NP.za are used in
South
Africa. National scale short-term ratings of AR-5 and AR-6 may also be
applied to Argentine obligations.
Short-Term
Obligation Ratings
The
Municipal Investment Grade (MIG) scale is used for US municipal cash
flow
notes, bond anticipation notes and certain other short-term obligations,
which typically mature in three years or less. Under certain circumstances,
the MIG scale is used for bond anticipation notes with maturities
of up to five years.
MIG
1: This designation denotes superior credit quality. Excellent protection
is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated
broad-based access to the market for refinancing.
MIG
2: This designation denotes strong credit quality. Margins of protection
are
ample, although not as large as in the preceding group.
MIG
3: This designation denotes acceptable credit quality. Liquidity and
cash-flow
protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG:
This designation denotes speculative-grade credit quality. Debt instruments
in this category may lack sufficient margins of protection.
Demand
Obligation Ratings
In
the case of variable rate demand obligations (VRDOs), a two-component
rating
is assigned. The components are a long-term rating and a short-term demand
obligation rating. The long-term rating addresses the issuer’s ability
to meet scheduled principal and interest payments. The short-term demand
obligation rating addresses the ability of the issuer or the liquidity
provider
to make payments associated with the purchase-price-upon-demand
feature (“demand feature”) of the VRDO. The short-term demand obligation
rating uses a variation of the MIG scale called the Variable Municipal
Investment Grade (VMIG) scale.
VMIG
1: This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment
of purchase price upon demand.
VMIG
2: This designation denotes strong credit quality. Good protection is
afforded
by the strong short-term credit strength of the liquidity provider
A-2PROSPECTUS |
PIMCO ETF Trust
and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG
3: This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment
of purchase price upon demand.
SG:
This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that
does
not have a sufficiently strong short-term rating or may lack the structural
or legal protections necessary to ensure the timely payment of purchase
price upon demand.
Standard
& Poor’s Ratings Services
Long-Term
Issue Credit Ratings
Issue
credit ratings are based, in varying degrees, on S&P Global Ratings’
(“S&P”)
analysis of the following considerations:
■ |
Likelihood
of payment—capacity and willingness of the obligor to meet
its financial commitments on an obligation in accordance with
the terms of the obligation; |
■ |
Nature
and provisions of the financial obligation and the promise S&P
imputes; and |
■ |
Protection
afforded by, and relative position of, the financial obligation
in the event of a bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting
creditors’ rights. |
Issue
ratings are an assessment of default risk, but may incorporate an assessment
of relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect
lower
priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured
and
unsecured obligations, or operating company and holding company obligations.)
Investment
Grade
AAA:
An obligation rated ‘AAA’ has the highest rating assigned by S&P.
The
obligor’s capacity to meet its financial commitments on the obligation
is
extremely strong.
AA:
An obligation rated ‘AA’ differs from the highest-rated obligations only
to
a small degree. The obligor’s capacity to meet its financial commitments
on
the obligation is very strong.
A:
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is still strong.
BBB:
An obligation rated ‘BBB’ exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to weaken the obligor’s capacity to meet its financial commitments on
the
obligation.
Speculative
Grade
Obligations
rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant
speculative characteristics. ‘BB’ indicates the least degree of
speculation
and ‘C’ the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposure to adverse conditions.
BB:
An obligation rated ‘BB’ is less vulnerable to nonpayment than other
speculative
issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions that could lead
to the obligor’s inadequate capacity to meet its financial commitments
on
the obligation.
B:
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations
rated ‘BB’, but the obligor currently has the capacity to meet its financial
commitments on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to
meet
its financial commitments on the obligation.
CCC:
An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and
is
dependent upon favorable business, financial, and economic conditions
for
the obligor to meet its financial commitments on the obligation. In the
event
of adverse business, financial, or economic conditions, the obligor is
not
likely to have the capacity to meet its financial commitments on the
obligation.
CC:
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
The
‘CC’ rating is used when a default has not yet occurred, but S&P
expects
default to be a virtual certainty, regardless of the anticipated time
to
default.
C:
An obligation rated ‘C’ is currently highly vulnerable to nonpayment, and
the
obligation is expected to have lower relative seniority or lower ultimate
recovery
compared with obligations that are rated higher.
D:
An obligation rated ‘D’ is in default or in breach of an imputed promise.
For
non-hybrid capital instruments, the ‘D’ rating category is used when
payments
on an obligation are not made on the date due, unless S&P believes
that such payments will be made within five business days in the absence
of a stated grace period or within the earlier of the stated grace period
or 30 calendar days. The ‘D’ rating also will be used upon the filing
of
a bankruptcy petition or the taking of similar action and where default
on
an obligation is a virtual certainty, for example due to automatic stay
provisions.
A rating on an obligation is lowered to ‘D’ if it is subject to a distressed
exchange offer.
NR:
This indicates that a rating has not been assigned or is no longer assigned.
Plus
(+) or minus (-): The ratings from ‘AA’ to ‘CCC’ may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within
the
rating categories.
Short-Term
Issue Credit Ratings
A-1:
A short-term obligation rated ‘A-1’ is rated in the highest category by
S&P.
The obligor’s capacity to meet its financial commitments on the obligation
is strong. Within this category, certain obligations are designated with
a plus sign (+). This indicates that the obligor’s capacity to meet its
financial
commitments on these obligations is extremely strong.
A-2:
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
October
30, 2020 PROSPECTUSA-3
than
obligations in higher rating categories. However, the obligor’s capacity
to meet
its financial commitments on the obligation is satisfactory.
A-3:
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to weaken an obligor’s capacity to meet its financial
commitments on the obligation.
B:
A short-term obligation rated ‘B’ is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the capacity
to
meet its financial commitments; however, it faces major ongoing uncertainties
that could lead to the obligor’s inadequate capacity to meet its
financial commitments.
C:
A short-term obligation rated ‘C’ is currently vulnerable to nonpayment
and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitments on the obligation.
D:
A short-term obligation rated ‘D’ is in default or in breach of an imputed
promise.
For non-hybrid capital instruments, the ‘D’ rating category is used when
payments on an obligation are not made on the date due, unless S&P
believes
that such payments will be made within any stated grace period. However,
any stated grace period longer than five business days will be treated
as five business days. The ‘D’ rating also will be used upon the filing
of
a bankruptcy petition or the taking of a similar action and where default
on
an obligation is a virtual certainty, for example due to automatic stay
provisions.
A rating on an obligation is lowered to ‘D’ if it is subject to a distressed
exchange offer.
Dual
Ratings: Dual ratings may be assigned to debt issues that have a put
option
or demand feature. The first component of the rating addresses the likelihood
of repayment of principal and interest as due, and the second component
of the rating addresses only the demand feature. The first component
of the rating can relate to either a short-term or long-term transaction
and accordingly use either short-term or long-term rating symbols.
The second component of the rating relates to the put option and is
assigned a short-term rating symbol (for example, ‘AAA/A-1+’ or
‘A-1+/A-1’).
With U.S. municipal short-term demand debt, the U.S. municipal short-term
note rating symbols are used for the first component of the rating
(for example, ‘SP-1+/A-1+’).
Active
Qualifiers
S&P
uses the following qualifiers that limit the scope of a rating. The structure
of the transaction can require the use of a qualifier such as a ‘p’ qualifier,
which indicates the rating addresses the principal portion of the obligation
only. A qualifier appears as a suffix and is part of the rating.
L:
Ratings qualified with ‘L’ apply only to amounts invested up to federal
deposit
insurance limits.
p:
This suffix is used for issues in which the credit factors, the terms, or
both,
that determine the likelihood of receipt of payment of principal are
different
from the credit factors, terms or both that determine the likelihood
of
receipt of interest on the obligation. The ‘p’ suffix indicates that the
rating
addresses the principal portion of the obligation only and that the interest
is not rated.
prelim:
Preliminary ratings, with the ‘prelim’ suffix, may be assigned to obligors
or obligations, including financial programs, in the circumstances described
below. Assignment of a final rating is conditional on the receipt by
S&P of appropriate documentation. S&P reserves the right not to issue a
final
rating. Moreover, if a final rating is issued, it may differ from the
preliminary
rating.
■ |
Preliminary
ratings may be assigned to obligations, most commonly
structured and project finance issues, pending receipt of
final documentation and legal opinions. |
■ |
Preliminary
ratings may be assigned to obligations that will likely be
issued upon the obligor’s emergence from bankruptcy or similar
reorganization, based on late-stage reorganization plans, documentation
and discussions with the obligor. Preliminary ratings
may also be assigned to the obligors. These ratings consider
the anticipated general credit quality of the reorganized or
post-bankruptcy issuer as well as attributes of the anticipated
obligation(s). |
■ |
Preliminary
ratings may be assigned to entities that are being formed
or that are in the process of being independently established
when, in S&P’s opinion, documentation is close to final.
Preliminary ratings may also be assigned to the obligations
of
these entities. |
■ |
Preliminary
ratings may be assigned when a previously unrated entity
is undergoing a well-formulated restructuring, recapitalization,
significant financing or other transformative event,
generally at the point that investor or lender commitments are
invited. The preliminary rating may be assigned to the entity and
to its proposed obligation(s). These preliminary ratings consider
the anticipated general credit quality of the obligor, as well
as attributes of the anticipated obligation(s), assuming successful
completion of the transformative event. Should the transformative
event not occur, S&P would likely withdraw these preliminary
ratings. |
■ |
A
preliminary recovery rating may be assigned to an obligation that
has a preliminary issue credit rating. |
t:
This symbol indicates termination structures that are designed to honor
their
contracts to full maturity or, should certain events occur, to terminate
and
cash settle all their contracts before their final maturity date.
cir:
This symbol indicates a Counterparty Instrument Rating (CIR), which is a
forward-looking
opinion about the creditworthiness of an issuer in a securitization
structure with respect to a specific financial obligation to a counterparty
(including interest rate swaps, currency swaps, and liquidity facilities).
The CIR is determined on an ultimate payment basis; these opinions
do not take into account timeliness of payment.
Inactive
Qualifiers (no longer applied or outstanding)
*:This
symbol indicated that the rating was contingent upon S&P receipt of
an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows. Discontinued use in August 1998.
c:
This qualifier was used to provide additional information to investors that
the
bank may terminate its obligation to purchase tendered bonds if the long-term
credit rating of the issuer was lowered to below an
investment-
A-4PROSPECTUS |
PIMCO ETF Trust
grade
level and/or the issuer’s bonds were deemed taxable. Discontinued use in
January 2001.
G:
The letter ‘G’ followed the rating symbol when a fund’s portfolio consisted
primarily of direct U.S. government securities.
pi:
This qualifier was used to indicate ratings that were based on an analysis
of an issuer’s published financial information, as well as additional
information
in the public domain. Such ratings did not, however, reflect in-depth
meetings with an issuer’s management and therefore, could have been
based on less comprehensive information than ratings without a ‘pi’ suffix.
Discontinued use as of December 2014 and as of August 2015 for Lloyd’s
Syndicate Assessments.
pr:
The letters ‘pr’ indicate that the rating was provisional. A provisional
rating
assumed the successful completion of a project financed by the debt being
rated and indicates that payment of debt service requirements was largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, made no comment on the likelihood of or the risk
of default upon failure of such completion.
q:
A ‘q’ subscript indicates that the rating is based solely on quantitative
analysis
of publicly available information. Discontinued use in April 2001.
r:
The ‘r’ modifier was assigned to securities containing extraordinary risks,
particularly
market risks, that are not covered in the credit rating. The absence
of an ‘r’ modifier should not be taken as an indication that an obligation
would not exhibit extraordinary non-credit related risks. S&P discontinued
the use of the ‘r’ modifier for most obligations in June 2000 and
for the balance of obligations (mainly structured finance transactions)
in
November 2002.
Fitch
Ratings
Long-Term
Credit Ratings
Investment
Grade
Rated
entities in a number of sectors, including financial and non-financial
corporations,
sovereigns, insurance companies and certain sectors within public
finance, are generally assigned Issuer Default Ratings (“IDRs”). IDRs
are
also assigned to certain entities or enterprises in global infrastructure,
project
finance, and public finance. IDRs opine on an entity’s relative vulnerability
to default (including by way of a distressed debt exchange) on financial
obligations. The threshold default risk addressed by the IDR is generally
that of the financial obligations whose non-payment would best reflect
the uncured failure of that entity. As such, IDRs also address relative
vulnerability
to bankruptcy, administrative receivership or similar concepts.
In
aggregate, IDRs provide an ordinal ranking of issuers based on the agency’s
view of their relative vulnerability to default, rather than a prediction
of a specific percentage likelihood of default.
AAA:
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of
default
risk. They are assigned only in cases of exceptionally strong capacity
for
payment of financial commitments. This capacity is highly unlikely to be
adversely
affected by foreseeable events.
AA:
Very high credit quality. ‘AA’ ratings denote expectations of very low
default
risk. They indicate very strong capacity for payment of financial
commitments.
This capacity is not significantly vulnerable to foreseeable events.
A:
High credit quality. ‘A’ ratings denote expectations of low default risk.
The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or
economic
conditions than is the case for higher ratings.
BBB:
Good credit quality. ‘BBB’ ratings indicate that expectations of default
risk
are currently low. The capacity for payment of financial commitments is
considered
adequate, but adverse business or economic conditions are more
likely to impair this capacity.
Speculative
Grade
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability to default
risk,
particularly in the event of adverse changes in business or economic
conditions
over time; however, business or financial flexibility exists that supports
the servicing of financial commitments.
B:
Highly speculative. ‘B’ ratings indicate that material default risk is
present,
but a limited margin of safety remains.
CCC:
Substantial credit risk.
CC:
Very high levels of credit risk.
C:
Near default.
A
default or default-like process has begun, or the issuer is in standstill, or
for
a closed funding vehicle, payment capacity is irrevocably impaired. Conditions
that are indicative of a ‘C’ category rating for an issuer include:
a.
the issuer has entered into a grace or cure period following non-payment
of
a material financial obligation;
b.
the issuer has entered into a temporary negotiated waiver or standstill
agreement
following a payment default on a material financial obligation;
c.
the formal announcement by the issuer or their agent of a distressed debt
exchange;
d.
a closed financing vehicle where payment capacity is irrevocably impaired
such
that it is not expected to pay interest and/or principal in full during the
life
of the transaction, but where no payment default is imminent
RD:
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch Ratings’
opinion
has experienced an uncured payment default or distressed debt exchange
on a bond, loan or other material financial obligation but which has
not entered into bankruptcy filings, administration, receivership, liquidation
or other formal winding-up procedure, and which has not otherwise
ceased operating. This would include:
i.
the selective payment default on a specific class or currency of
debt;
ii.
the uncured expiry of any applicable grace period, cure period or default
forbearance
period following a payment default on a bank loan, capital markets
security or other material financial obligation;
iii.
the extension of multiple waivers or forbearance periods upon a payment
default on one or more material financial obligations, either in series
or in parallel; ordinary execution of a distressed debt exchange on one
or more material financial obligations.
D:
Default. ‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has
entered
into bankruptcy filings, administration, receivership, liquidation or
October
30, 2020 PROSPECTUSA-5
other
formal winding-up procedure or that has otherwise ceased business. Default
ratings are not assigned prospectively to entities or their obligations;
within this context, non-payment on an instrument that contains a
deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period, unless a
default is
otherwise driven by bankruptcy or other similar circumstance, or by a
distressed debt exchange.
“Imminent”
default, categorized under ‘C’, typically refers to the occasion where
a payment default has been intimated by the issuer, and is all but inevitable.
This may, for example, be where an issuer has missed a scheduled
payment, but (as is typical) has a grace period during which it may
cure the payment default. Another alternative would be where an issuer
has formally announced a distressed debt exchange, but the date of the
exchange still lies several days or weeks in the immediate
future.
In
all cases, the assignment of a default rating reflects the agency’s opinion
as
to the most appropriate rating category consistent with the rest of its
universe
of ratings, and may differ from the definition of default under the terms
of an issuer’s financial obligations or local commercial practice.
The
modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. For example, the rating category ‘AA’
has
three notch-specific rating levels (‘AA+’; ‘AA’; ‘AA-‘; each a rating
level).
Such suffixes are not added to ‘AAA’ ratings and ratings below the ‘CCC’
category.
Recovery
Ratings
Recovery
Ratings are assigned to selected individual securities and obligations,
most frequently for individual obligations of corporate finance issuers
with IDRs in speculative grade categories.
Among
the factors that affect recovery rates for securities are the collateral,
the
seniority relative to other obligations in the capital structure (where
appropriate),
and the expected value of the company or underlying collateral
in distress.
The
Recovery Rating scale is based on the expected relative recovery characteristics
of an obligation upon the curing of a default, emergence from
insolvency or following the liquidation or termination of the obligor or
its
associated collateral.
Recovery
Ratings are an ordinal scale and do not attempt to precisely predict
a given level of recovery. As a guideline in developing the rating assessments,
the agency employs broad theoretical recovery bands in its ratings
approach based on historical averages and analytical judgment, but actual
recoveries for a given security may deviate materially from historical
averages.
RR1:
Outstanding
recovery prospects given default.
‘RR1’ rated securities have
characteristics consistent with securities historically recovering
91%-100%
of current principal and related interest.
RR2:
Superior
recovery prospects given default.
‘RR2’ rated securities have characteristics
consistent with securities historically recovering 71%-90% of current
principal and related interest.
RR3:
Good
recovery prospects given default.
‘RR3’ rated securities have characteristics
consistent with securities historically recovering 51%-70% of current
principal and related interest.
RR4:
Average
recovery prospects given default.
‘RR4’ rated securities have characteristics
consistent with securities historically recovering 31%-50% of current
principal and related interest.
RR5:
Below
average recovery prospects given default. ‘RR5’
rated securities have
characteristics consistent with securities historically recovering
11%-30%
of current principal and related interest.
RR6:
Poor
recovery prospects given default.
‘RR6’ rated securities have characteristics
consistent with securities historically recovering 0%-10% of current
principal and related interest.
Short-Term
Credit Ratings
A
short-term issuer or obligation rating is based in all cases on the
short-term
vulnerability to default of the rated entity and relates to the capacity to
meet
financial obligations in accordance with the documentation governing
the
relevant obligation. Short-term deposit ratings may be adjusted for loss
severity.
Short-Term Ratings are assigned to obligations whose initial maturity
is viewed as “short term” based on market convention. Typically, this
means up to 13 months for corporate, sovereign, and structured obligations,
and up to 36 months for obligations in U.S. public finance markets.
F1:
Highest short-term credit quality. Indicates the strongest intrinsic
capacity
for timely payment of financial commitments; may have an added “+”
to denote any exceptionally strong credit feature.
F2:
Good short-term credit quality. Good intrinsic capacity for timely payment
of financial commitments.
F3:
Fair short-term credit quality. The intrinsic capacity for timely payment
of
financial commitments is adequate.
B:
Speculative short-term credit quality. Minimal capacity for timely payment
of financial commitments, plus heightened vulnerability to near term
adverse changes in financial and economic conditions.
C:
High short-term default risk. Default is a real possibility.
RD:
Restricted default. Indicates an entity that has defaulted on one or
more
of its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
D:
Default. Indicates a broad-based default event for an entity, or the
default
of a short-term obligation.
A-6PROSPECTUS |
PIMCO ETF Trust
THIS
PAGE WAS INTENTIONALLY LEFT BLANK
INVESTMENT
MANAGER
PIMCO,
650 Newport Center Drive, Newport Beach, CA 92660
DISTRIBUTOR
PIMCO
Investments LLC, 1633 Broadway, New York, NY 10019
CUSTODIAN
State
Street Bank & Trust Co., State Street Financial Center, One Lincoln Street,
Boston, MA 02111
TRANSFER
AGENT
State
Street Bank & Trust Co., State Street Financial Center, One Lincoln Street,
Boston, MA 02111
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers
LLP, 1100 Walnut Street, Suite 1300, Kansas City, MO 64106-2197
LEGAL
COUNSEL
Dechert
LLP, 1900 K Street N.W., Washington, D.C. 20006
For
further information about the PIMCO ETF Trust, call 1.888.400.4ETF or visit our
website at www.pimcoetfs.com.
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|
|
.
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.
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PIMCO
ETF Trust
650
Newport Center Drive
Newport
Beach, CA 92660
The
Trust’s SAI and annual and semi-annual reports to shareholders include
additional information about the Funds. The SAI is incorporated
by reference into this prospectus, which means it is part of
this prospectus for legal purposes. The Funds’ annual report discusses
the market conditions and investment strategies that significantly
affected each Fund’s performance during its last fiscal year.
You
may get free copies of any of these materials or request other information
about a Fund by calling the Trust at 1.888.400.4ETF
(1.888.400.4383), by
visiting www.pimcoetfs.com or by writing to:
PIMCO
ETF Trust
650 Newport
Center Drive
Newport
Beach, CA 92660
You
may access reports and other information about the Trust on the EDGAR
Database on the Commission’s web site at www.sec.gov. You
may get copies of additional information about the Trust, including
its SAI, with payment of a duplication fee, by e-mailing your
request to [email protected].
You
can also visit our web site at www.pimcoetfs.com for additional information
about the Funds, including the SAI and the annual and semi-annual
reports, which are available for download free of charge.
Reference
the Trust’s Investment Company Act file number in your correspondence.
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Investment
Company Act File Number: 811-22250 |
ETF0003_103020 |