With global stock markets taking investors on a wild ride over the last several months, many traditional equity investors have been looking to fixed-income to solve their problems. The relative complexity of the bond market and its auctioning mechanisms, however, have driven hordes of individual retail investors into two of the most prominent fixed-income exchange-traded funds: the iShares Barclays Treasury Inflation-Protected Securities Bond Fund (TIP) and the PIMCO Total Return ETF (BOND). Here's a closer look at what each fund is comprised of specifically, for investors looking to do some more due diligence before making a final investment decision. The top five holdings of each fund by weight are discussed.
BOND: The PIMCO Total Return ETF
BOND's largest holding is FNCL 3.5 9/12, which makes up 8.221% of the fund. This is a Fannie Mae mortgage agency fixed-income security with 3.5% coupon and CUSIP 01F032690. For insight on collateral reports and potential prepayments, Bloomberg Mortgage Market Insight provides some fantastic information.
BOND's second largest holding is FNCL 3 9/12, which makes up 2.601% of the fund. Holders take 3% coupon on this security with CUSIP 01F030694, issued by Fannie Mae as well and backed by mortgages (keep an eye on those prepayments!).
BOND's third largest holding is TII 0 1/8 01/15/22, which makes up 2.14% of the fund. This is actually a United States Treasury Inflation Indexed Bond, with coupon 0.125%. CUSIP on this is 912828SA9. Issue price is $105.0654, and a quick glance at holders of this security returns big names like BlackRock Advisers (BLK), Delaware Management Company (DDF), Goldman Sachs Group Inc. (GS), Prudential Financial Inc. (PRU), Blackrock Fund Advisors, Fidelity Management and Research (ONEQ), Vanguard Group Inc. (VTI), JP Morgan Chase & Co (JPM), Ruffer LLP, Allianz Global, the Federal Reserve Bank of New York, and more.
Making up 1.848% of BOND is fourth-largest holding FHLMC 2 3/8 1/13/22. With AA+ rating from S&P (AAA and Aaa from Fitch and Moody's, respectively) and bullet maturity, these mortgage bonds issued by sovereign agency Freddie Mac carry a coupon of 2.375%. Ask and bid yield to maturity is 1.814%. A glance at holders of this security yields many of the names from above, as well as ING Investment Management (ING), Farmers Insurance Exchange, Toyota Motor (TM) Insurance Company, New York Life Insurance, AllianceBernstein LP (AB), and others.
The fifth largest holding of BOND is MBONO 6 1/2 06/10/21, which makes up 1.841% of the fund. These are Mexican Bonos with 6.5% coupon and bullet maturity, denominated in MXN. Ask yield currently stands at 5.08% and bid yield is at 5.12%. Issued in Mexico as sovereign debt, these bonds carry a Moody's rating of Baa1, S&P rating of A-, and Fitch rating of BBB+. BBGID is BBG001HM5N86.
Finally, skipping down to the cash: BOND holds 0.13% of its total assets in cash. Of this, $3,148,466 are in USD, $1,568,143.72 is held in MXN, $1,654,676 is held in JPY, and a small $757.61 of GBP and $137.95 in CAD is held as well (all assets USD-denominated). In addition to many of the firms given above, holders of this security also include Barclays (BCS) Multi-Manager Funds and Charles Schwab (SCHW) Investment Management, among others.
The top ten holdings of BOND overall comprise 24.09% of the total portfolio; these are the top 5 (not including the cash assets). In terms of sector allocation, sovereign debt is 21.16% of BOND; FNMA collateral represents 20.27%; commercial mortgage-backed securities comprise 5.84% overall; WL collateral CMOs and municipal debt each hold 5.48% of the fund; and debt from diversified financial services, agency collat. CMOs, insurane, and agency collat. PAC CMOs make up the rest. Geographically speaking, 54.57% of the fund is held in US debt, with Mexican debt holding 6.97% of assets, Japan 4.79%, Brazil 1.12%, the United Kingdom 1.03%, and Canada, Norway, the Cayman Islands, France, and South Korea the rest. In terms of asset allocations overall, mortgage assets comprise 35.78%, cash and related have 27.174%, government 22.116%, 9.45% corporate, and 5.48% municipal.
The PIMCO ETF Trust issuer is headquartered in Newport Beach, CA, and is structured as an open-end investment company with a 0.55% management fee. Share price of the actively-managed BOND on July 31, 2012 was $107.28, with NAV at $107.21. Total assets of BOND stand at $1.72 billion. One creation unit is made up of 100,000 shares, with a $500 creation fee. The fund has 639 holdings overall.
Overall, then, BOND's collection of government debt, securitized debt, corporate debt, U.S. municipal debt, cash equivalents, and cash itself makes for a powerful combination of assets that contribute to - in the manager's own words - the ETF's prospects to maximize total return. Individual investors can determine for themselves whether this is the case in reality; that is a question for a different day. For what it's worth, BOND has returned 1.9051% since March 2012.
TIP: The iShares Barclays TIPS Bond Fund
This ETF is much less exciting than its Total Return counterpart; as the name implies, the vast majority of this ETF's capital - 99.2% - is concentrated in different issues of U.S. Treasury inflation-protected fixed-income securities, with the remaining 0.8% held in cold, hard cash (United States dollars, to be specific). Still, this 0.8% of assets amounts to $209,787,634.91 in USD. Let's take a look at the top five treasury TIPS issues that are a large part of the remaining 99.2% (TII = Treasury Inflation Indexed Securities):
The top five fund holdings of TIP and their respective percentages of the total fund are TII 1 1/8 01/15/21 (6.956%); TII 0 5/8 07/15/21 (4.931%); TII 2 01/15/16 (4.797%); TII 2 1/8 02/15/41 (4.498%), and TII 2 3/8 01/15/25 (4.492%). All of these are United States Treasury Inflation Indexed Securities. The U.S. Treasury auctioned the first issue of the Inflation Indexed securities on Wednesday, January 29, 1997, the 3 3/8 1/15/2007 issue. In the Treasury's own words,
"The principal value of the notes will change daily, based on the CPI-U index (the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers published monthly by the Bureau of Labor Statistics of the U.S. Department of Labor). Daily accretion is based on straight-line interpolation, using the actual number of days in each month. There is a 3-month lag, so the October, 1996 CPI-U is the index level used for January 1, 1997, and the November, 1996 CPI-U is the index level used for February 1, 1997...In the case of deflation, the principal value will decline. However, should the principal value fall below 100 as a result of deflation, the Treasury will make up the difference when the principal is repaid at maturity. Thus the maturity value of the bonds will never be less than 100."
Clearly, for macroeconomic big-picture investors, such securities represent powerful opportunities to hedge and speculate. Again, the simple breakdown of TIP into government debt and cash makes for a relatively easier analysis for potential investors; for what it's worth, TIP has returned 5.3158% since the end of 2011. Price of a TIP share is currently $121.44, with NAV at $121.01. Structurally, the fund is comprised of 99.085% U.S. sovereign debt, with the remaining 0.915% in cash. One month return has been 1.49%, 3 month return has been 2.77%, YTD return is 5.47%, and 1-year, 3-year, and 5-year returns are 9.08%, 10.1%, and 8.23%, respectively.
Clearly, with the tens of billions of dollars pouring to both of these exchange-traded bond funds, the managers of these funds are making quite a bit in risk-free fees, regardless of their performance. For potential investors in TIP and/or BOND, though, the outcome is much less certain. Is this the tipping point? Will central banks take action in the next week and continue to drive the stock market and bond market crazy? Or will continued global economic turmoil push bond yields through the roof, especially when it comes to sovereign debt issues from the Eurozone and beyond? Only time will tell with respect to these macroeconomic quandaries. In the meantime, though, hopefully this breakdown of major fixed-income exchange-traded bond funds helps as a starting point to guide potential investment decisions into the future. Be sure to analyze the prospectus of any bond before a purchase decision is made. Good luck.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.