Should You Invest in Pimco's Stock Index Funds?

The big bond manager combines derivatives with its fixed-income expertise to create funds designed to better their indexes.

Call me a Luddite for thinking that indexing was a good enough idea on its own that it didn’t need improvement. But Pimco, with its line of StocksPLUS and IndexPLUS funds, which promise a juiced-up, derivatives-heavy version of index investing, begs to differ.

The seven Pimco funds cover a few asset classes -- including small and large U.S. companies and international stocks -- and share some core features. Each is tied to an index, with the fund manager seeking to replicate the index’s returns with derivatives rather than by holding the underlying securities (Pimco manages 11 funds in this style, but only seven are available in the no-load D class shares). Because derivatives are generally designed to make big bets with a small amount of cash, those positions don’t typically tie up all of a fund’s resources. So each fund then invests its cash in an actively managed bond portfolio. Those underlying bond portfolios will tend to track the moves of Pimco Total Return (symbol PTTAX), although some focus on shorter-term bonds while others focus on longer-term securities, says Steven Jones, who handles marketing for the funds. (Total Return, the world’s largest mutual fund, is managed by Pimco founder Bill Gross.) And the funds may employ further use of derivatives in managing those underlying bond portfolios.

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Elizabeth Leary
Contributing Editor, Kiplinger's Personal Finance
Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.