BOND: Diversified Investment-Grade Bond Holdings, Growing 4.6% Yield, Above-Average Returns

seekingalpha08-19

BOND is a diversified bond ETF from PIMCO.It focuses on high-quality, investment-grade securities, mostly MBS.It sports an above-average 4.6% yield, and has slightly outperformed its benchmark since ...

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In that article, I argued that BOND compared unfavorably to several ETFs focusing on variable rate investments, including the Janus Henderson AAA CLO ETF (JAAA) and the Janus Henderson B-BBB CLO ETF (JBBB). BOND has slightly outperformed since, almost entirely due to timing: the article got published as rates bottomed. Going for variable rate was the right call last year though, at least most of the time. Right now, higher rates are extremely unlikely, and both fixed-rate and variable rate investments seem fairly valued. I've grown more bullish on BOND as a result, and think its diversified holdings, growing 4.5% dividend yield, and above-average performance track-record, make it a buy. BOND - Basics  Sponsor: PIMCO  Dividend Yield: 4.53% Expense Ratio: 0.58% Total Returns CAGR (Inception): 2.56%   BOND - Overview and Investment Thesis BOND's investment thesis is quite simple, and rests on the fund's diversified, high-quality holdings, above-average yield, and above-average returns. Improved market conditions and more accommodative Fed policy are bullish for the fund too, and a potential short-term catalyst. Let's have a look at each of these points. Diversified High-Quality Holdings BOND is an actively-managed bond fund, administered by PIMCO. I've found most PIMCO bond funds outperform their benchmarks, including their ETFs. These are generally higher-quality, lower-yielding alternatives to their CEFs, and that includes BOND. BOND itself invests in a diversified assortment of bond sub-asset classes, focusing on investment-grade securitized products, mostly agency MBS, with sizable investments in treasuries and high-quality corporate bonds. It holds over 1,000 different securities, with some individual treasuries and MBS having mid single-digit weights, no bonds.   BONDBOND focuses on investment-grade securities, most being issued / guaranteed by the U.S. Federal Government. It does hold sizable investments in BBB-rated securities, mostly corporate bonds, and some smaller investments in high-yield. Lots of its investments carry no credit ratings, but most of these seem to be MBS and other securitized investments, which are generally investment-grade.   BOND - Table by AuthorBOND's diversified, high-quality holdings should suffer low losses during downturns and recessions, a significant benefit for shareholders. As an example, BOND was down less than 5.0% during early 2020, the onset of the coronavirus pandemic. Losses were short-lived too, lasting for around one month. On a more negative note, losses were slightly higher than those of broader bond indexes, performance much weaker than that of treasuries. Riskier high-yield bonds saw even greater losses, however.   Data by YChartsBOND is an actively-managed fund, so its investment management team influences its portfolio. As an example, the fund has increased its investments in MBS and similar securities these past few years. MBS trade at attractive spreads to treasuries right now, so the shift seems smart, in my opinion at least.   Data by YChartsDue to the above, BOND's returns are partly dependent on its management team, and its investment decisions. This is a small source of risk, but also of potential returns and outperformance. I think the shift towards MBS could lead to higher returns moving forward, although that has not really been the case in the past, at least not materially so.   Data by YChartsFinally, BOND sports a duration of 5.6 years, a moderate amount on an absolute basis, slightly lower than average.   Fund Filings - Table by AuthorIn my opinion, BOND's duration is neither a positive nor a negative, but it is an important fact for investors to consider. Dovish investors might prefer short-term or variable rate investments, which have higher yields (right now at least). Hawkish investors might prefer longer-term treasuries, to capitalize on (potential) capital gains as the Fed cuts rates later in the year. Do bear in mind, Fed cuts do not guarantee higher bond prices. The magnitude and speed of any cuts matters too, and some cuts are priced-in already. As a (partial) example, the Federal Reserve hiked rates by 1.0% in 2023:   Data by YChartsduring which bond prices rose, across the board:   Data by YChartsSignificant rate cuts would almost certainly lead to higher bond prices, but I'm not sure that the expected set of rate cuts qualifies. Smaller cuts might not lead to sizable bond price movements, similar to the hikes in 2023. Above-Average 4.5% Dividend Yield BOND sports a 4.5% dividend yield, a reasonable yield for an investment-grade bond ETF, and slightly higher than most of its peers. High-yield bonds do yield more, as do some more niche asset classes like senior loans, CLOs, and BDCs. Data by YChartsBOND's dividends are more than fully covered by underlying generation of income, as evidenced by the fund's 5.1% SEC yield.   BONDIn general, as ETFs distribute any and all income to investors as dividends, dividend yields should trend towards their SEC yields with time. BOND's dividends should see some growth from here on out, as has been the case these past few years. Do remember it generally takes years for bond ETFs to fully digest changes to Federal Reserve policy. The process seems mostly finished for BOND, but still needs a few more months. Data by YChartsBOND's dividend growth was almost entirely due to past Federal Reserve cuts and should stall as the Fed cuts rates later in the year. Much will depend on the speed and magnitude of any cuts though, especially considering the fact that prior hikes are still impacting the fund. As an aside, the uncertainty in the above genuinely reflects my assessment of the situation. I hedge much less when discussing CLO dividends, which should see their dividends decline in-line with Fed hikes. The situation is genuinely more complicated for most other bond ETFs, although the expectation should be of dividend cuts down the line. In any case, BOND's 4.5% dividend yield is reasonably good, and a bit higher than that of most investment-grade bond ETFs. Riskier high-yield bonds do have higher yields, but with default rates rising and credit spreads plummeting, investment-grade looks better. Performance Track-Record BOND's performance track-record is reasonably good, with the fund outperforming its benchmark since inception, and for most relevant time periods. It has outperformed treasuries too, underperformed corporate bonds.   Seeking Alpha - Table by AuthorBOND's outperformance was due to some combination of investment alpha and slightly higher credit risk. BOND's outperformance was whittled away by the fund's 0.58% expense ratio which, although not excessive, is materially higher than that of the cheapest bond ETFs. As an example, the Vanguard Total Bond Market Index Fund ETF (BND) sports a 0.05% expense ratio. At a high level, I think that what PIMCO is doing is clear. Start with the benchmark, add a bit of extra yield through higher credit risk, boost returns through positioning and security selection, split the excess between your investors and yourself. It is a reasonably good trade for the investor, although it would obviously be much better if the fees were lower. Conclusion  BOND's diversified holdings, growing 4.5% dividend yield, and above-average performance track-record, make it a buy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2460123053"}