Jerome M. Schneider, Head of Short-Term Portfolio Management at PIMCO, joined ETF Trends publisher Tom Lydon to discuss short-term bond ETF options that investors and financial advisors can use for capital preservation.
For instance, PIMCO offers the PIMCO Enhanced Short Maturity Active ETF (NYSEArca: MINT) and the PIMCO Low Duration Active ETF, (NYSEArca: LDUR). While the two ETFs may sound similar in nature, the funds are very different.
“We want to offer clients access to the entire short-end of the curve,” Schneider told ETF Trends.
For example, Schneider explained that MINT is meant to be an incremental step outside of the money market funds. Investors would use the actively managed ETF for capital preservation or to take a defensive view on the market.
MINT has an ultra-short 0.28 year duration and a 1.34% 30-day SEC yield. The short duration helps the fund navigate a rising rate environment – a 1% interest rate hike would only translate to about 0.28% decline – and still generate decent yields.
The enhanced short maturity active ETF holds a basket of mortgage securities 15.6%, investment-grade credit 78.1% and emerging market debt 2.9%. Top country weights include U.S. 54.4%, Japan 5.9%, South Korea 5.9%, U.K. 5.4%, Germany 4.4%, Switzerland 4.2% and France 3.8%. The majority of the portfolio is held in investment-grade debt, with only a little over 4% in speculative-grade and non-rated debt.
On the other hand, Schneider explained that LDUR takes greater global short-term focus that allows investors to preserve capital but with greater diversification. LDUR also comes with a slightly longer 1.41 year duration and a higher 1.60% 30-day SEC yield.
Debt allocations include mortgage 6.4%, investment-grade credit 51.2%, high-yield credit 4.5%, non-U.S. developed 22.1% and emerging markets 2.7%. The ETF also includes a greater tilt toward non-rated debt 27.8%, along with 6.1% in speculative-grade debt.
The U.S. only makes up 24.6% of LDUR’s portfolio, along with Canada 16.0%, Germany 15.1%, Australia 14.5%, Switzerland 3.5% and South Korea 2.2%, among others.
Investors may find that these two ETFs can be used as alternatives to traditional cash vehicles and the funds can adjust their strategic allocations to include short-term strategies that are more flexible to manage credit, interest rate and liquidity risks.
Given the greater risk of rising interest rates on the fixed-income space, bond ETF investors may do well with an actively managed approach.
“Once the Fed rate hike cycle beings, the yield curve will not necessarily move uniformly and line up with what the Fed does at the front end,” Jim Moore, Managing Director at PIMCO, wrote in a research note. “An active manager can pick spots on the yield curve where they see risk/return characteristics as more favorable as opposed to simply replicating the allocations of an index.”
For instance, Moore pointed out that active managers can potentially capitalize on structural inefficiencies in the market, targeting quality securities that are better priced or higher yielding.
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