BOND: A Strong, Decent-Yielding, Diversified, High-Quality Bond Portfolio

~ by Snehasish Chaudhuri, MBA (Finance)

PIMCO Active Bond ETF (NYSE:BOND) is an exchange-traded fund (“ETF”) that invests in investment grade debt securities issued by U.S. and non-U.S. public- or private-sector entities. Most of its investments are in the US, and 56.5 percent are rated investment grade. The fund also uses leverage. This ETF was launched and is managed by Pacific Investment Management Company LLC. (PIMCO). PIMCO has a reputation and history of delivering strong returns in its funds.

In the case of BOND, PIMCO consistently selects fixed income securities with above-average yields and returns, but without significantly higher risk or volatility. BOND’s yield is decent enough in an overall bearish market. Moreover, this fund is in a position to witness strong and consistent growth in the long run. This strong, decent-yielding, diversified, highly-rated bond portfolio may seem appropriate for conservative investors and retirees.

PIMCO Active Bond ETF’s Portfolio Seems to be an Efficiently Managed Fund

PIMCO Active Bond ETF benchmarks itself against the Bloomberg U.S. Aggregate Index, which is perhaps the most popular benchmark in the fixed income market. However, the fund is actively managed and has the flexibility to invest in the sectors or instruments outside its benchmark. Thus, asset allocations and security selection are both somewhat dependent on the fund’s investment management team.

This enables the fund to generate higher coupon income than its benchmark. The fund was launched almost 11 years back and paid monthly dividends on a consistent basis. Average yield generated by BOND was 3.44 percent in 2022, and 3.37 percent this year. This level of yield is decent for a diversified, high-quality bond fund. Average annual total return during three years (2019 to 2021) also stood strong at 5.2 percent.

PIMCO Active Bond ETF has a strong asset base with an asset under management (AUM) of $3.33 billion. 85 percent of the entire portfolio has a maturity less than 10 years, 43 percent has a maturity between 5 and 10 years, and BOND’s portfolio has a weighted-average maturity of 9.57 years. Its expense ratio stands at 0.55 percent, which is decent, but a bit on the higher side considering this is a fixed income portfolio. The prime reason behind this is BOND’s high turnover ratio of 368 percent, implying that PIMCO changes the composition of this portfolio on a frequent basis. While the turnover may seem extremely high, for such a scaled fund manager like PIMCO, it may also mean that the fund managers are making most of the market inefficiencies.

PIMCO Active Bond ETF is a Diversified, High-yielding, High-quality Bond Fund

Security-wise, this portfolio has a low allocation in treasuries, and the largest allocation is in investment grade securities followed by mortgage-backed securities (MBS). At present, the portfolio has a 10 percent investment in treasuries and 37 percent in investment grade credit securities. This portfolio also invests in high-yield corporate bonds, but in a relatively small proportion. The average credit rating of BOND’s entire portfolio is A+, implying it to be a high-quality portfolio. Due to concerns about rising interest rates, the fund seems to have limited its investment in treasuries. But going forward, I expect this proportion to increase, as the scope of rising rates is really very low.

Also, treasuries have underperformed in 2022, so the fund managers can be credited for allocation of lower percentage of assets on treasuries. Returns of fixed income securities are closely related with performance and stability of overall credit markets. Every type of credit instrument has some risks involved. However, the treasury, and investment-grade securities are less risky. So, when the broader credit market is more volatile and generates low returns, people tend to get more attracted towards ETFs like PIMCO Active Bond ETF. As bonds can be purchased at a premium or discount to par without affecting the maturity value or principal, these investments are easier to bet upon.

BOND is a Decent Fund, Better Than the Index, But Nothing Too Spectacular

As interest rates keep on rising and stay inflated, it impacts bond prices, and particularly funds like PIMCO Active Bond ETF. As interest rates go up, the price of outstanding bonds decreases, because the opportunity cost of holding existing bonds increases. This problem may get solved in the long run, as interest rate stabilizes or comes back to the level of the pre-crisis period, provided investors all over the globe regain confidence over the bond market. BOND’s yield and returns, although not particularly high on an absolute basis, is higher than that of its benchmark, and broad-based bond indexes. In my opinion, BOND’s yield is decent enough for a diversified, high-quality bond fund. High-yield corporate bond funds may generate higher returns, but those also possess a higher degree of risk. So, BOND suits conservative investors.

Fixed income securities have low portfolio risk, low volatility, and suffer less losses during bearish phase. During the onset of the Covid-19 pandemic, bonds suffered much lower losses than most of their diversified equity indexes. In my opinion, BOND is a diversified, safe, high-quality fund, which is in a position to suffer less losses during any future downturn or recession. BOND’s portfolio has an average duration of 6.2, meaning that net asset value (NAV) of this fund will decrease by 6.2 percent for every 1 percent increase in interest rates.

PIMCO Active Bond ETF no doubt is superior to most comparable funds, but at the same time lags behind the high-yielding bond funds. In my opinion, PIMCO Active Bond ETF is a good fund, and better than the index, but nothing too spectacular.