ETF Trends
ETF Trends

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.

“In general, high yield bonds with short maturities – under five years – can have some advantages over those with longer maturities,” PIMCO portfolio manager Vineer Bhansali wrote in a recent commentary on HYS.

“Shorter maturity bonds have lower spread duration, or sensitivity to spread movements, so they are more defensive in a world where we think equities and credit can be fairly volatile,” he said. “We chose to track an index that invests in bonds with maturities of zero to five years, rather than one to five years, because it allows us to hold bonds until maturity rather than having to sell them at the one-year point. This potentially lowers transaction costs and volatility.”

The PIMCO ETF also uses a credit screen that excludes illiquid bonds and “red light” credits from issuers whose viability as a going concern is in serious question.

PIMCO 0-5 Year High Yield Corporate Bond Index Fund

Full disclosure: Tom Lydon’s clients own HYG and JNK.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.