PIMCO’s ETF for high-yield corporate debt tracks shorter maturity bonds, which makes it different than most competitors. The fund aims for lower volatility and transaction costs, and is Morningstar’s top pick for the popular sector.
PIMCO 0-5 Year High Yield Corporate Bond Index Fund (NYSEArca: HYS) holds assets of $378.9 million.
The largest junk bond ETFs are iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays Capital High Yield Bond (NYSEArca: JNK). They have been hot with investors seeking to boost yield. [Are High-Yield Bond ETFs in a Bubble?]
Morningstar analyst Samuel Lee reluctantly endorses the PIMCO fund.
“I dislike most junk-bond exchange traded funds. With their coupons taxed as ordinary income, they’re the taxman’s best friend. And their underlying holdings are much more illiquid than the typical ETF’s, creating the potential for big premiums/discounts and atrocious trading costs,” he wrote in the August edition of Morningstar’s ETF newsletter. “But if you held a gun to my head and forced me to pick the best junk-bond ETF, I’d pick PIMCO 0-5 Year High Yield Corporate Bond Index.”
The biggest reason is that the ETF’s index doesn’t kick out bonds with maturities lower than one year, he added. Most high-yield indices exclude bonds with maturities under a year.
The resulting selling pressure on these short-duration bonds depresses their prices and makes the yield more attractive, Lee noted.