Use These ETFs to Follow an Unconstrained Bill Gross

Bill Gross spoke for the first time this weekend since his abrupt departure from Pimco. And boy, did he say a lot.

Besides expressing his eagerness to start managing money again at Janus, where he'll manage a small unconstrained global bond fund, he tossed out three investing ideas. Here's Gross in an excerpt from the Barron’s interview:

"Most of the opportunity, which has developed in recent weeks, is offshore. There is significant opportunity in Mexico, which has half the debt level of the U.S., and interest rates in the 6% range. Mexico is attached to the U.S. in terms of trade, so it is a pretty safe emerging market. This is an opportunity I would try to take advantage of in the unconstrained fund.

I expect the fund to have a decent percentage of short-term high-yield paper on Monday—10% to 25%—that yields 3% to 4%. Currencies are another possibility. As the euro and yen fall, there is an opportunity to take advantage of the relative strength of the dollar."

For those who trust in Gross’s investing acumen but don’t want to pay the high fees of his Janus fund -- the A share class has an expense ratio of 1.08 percent and a front-end load of 4.75 percent -- three ETFs allow you to take advantage of some the opportunities he mentioned.

WisdomTree Emerging Markets Local Debt Fund (ELD )

While there are no Mexico fixed-income ETFs, among emerging markets debt ETFs this one has the highest weighting to Mexico, at 11.2 percent of assets. It is actively managed and designed to track investment-grade emerging markets debt in local currencies. Other countries with similar weightings to Mexico in the ETF include Malaysia, Brazil and Poland. Its performance is flat this year, but it yields 3.9 percent. ELD has $774 million in assets and charges 0.55 percent of assets in annual fees.

While the bonds in ELD have attractive yields, investors should be aware of the currency risk. Returns could suffer if the dollar strengthens against the local currency. An alternative is to use a U.S. dollar-based emerging markets debt ETF like WisdomTree Emerging Markets Corporate Bond Fund (EMCB ). It tracks emerging markets corporate bonds and has a 10 percent weighting in Mexico.

iShares 0-5 Year High Yield Corporate Bond ETF (SHYG )

SHYG is the short-term bond ETF with a yield that comes closest to Gross's 3 percent to 4 percent sweet spot. It's taking on a little less of the really junky junk debt -- the riskiest categories of high yield -- than peers and yields a little less than them, at 3.9 percent. This ETF is trying to thread the needle by offering high yield without too much interest rate risk and with a little less credit risk. SHYG is the cheapest ETF in its category, at 0.30 percent. It has $84 million in assets.

PowerShares DB US Dollar Index Bullish Fund (UUP )

This ETF uses derivatives to go long, or bet on a gain, in the value of the U.S. dollar versus the euro, Canadian dollar, Japanese yen, British pound, Swedish krona and Swiss franc. The ETF's biggest short position is against the euro, which has helped its performance recently. It's returned 8 percent in the past three months.

A lack of exposure to emerging markets currencies is the one rap against this ETF. In the current environment, where it's the developed market central banks weakening their own currencies, this has proven a good thing.

A warning: This ETF is taxed as if it you held the futures yourself, which means you pay tax each year regardless of whether you sell. In addition, most investors probably have plenty of long U.S. dollar exposure in the rest of their portfolio. UUP is pricey, charging 0.80 percent, and has $733 million in assets.

More stories from Eric Balchunas:

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Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here; weekly ETF podcasts can be found here.

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