BOND: ETF For The Conservative Income Investor, 2.5% Dividend Yield

Summary

  • BOND is a diversified actively-managed bond ETF administered by PIMCO.
  • BOND focuses on high-quality low-risk holdings like Treasuries and investment-grade corporate bonds.
  • The PIMCO Active Bond Exchange-Traded Fund is an actively-managed diversified bond fund. Unlike most other PIMCOs, bond funds are generally the best in the business. BOND is no exception.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

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The PIMCO Active Bond Exchange-Traded Fund (NYSEARCA:BOND) is an actively-managed diversified bond fund.

Unlike most other PIMCO bond funds, BOND focuses on higher-quality lower-yielding securities, including Treasuries, mortgage-backed securities, and investment-grade corporate bonds. BOND is a safe investment, and one which suffers minimal losses during downturns and recessions.

Like most other PIMCO bond funds, BOND is able to leverage the institutional knowledge, expertise, and capabilities of PIMCO and its investment managers to deliver consistent alpha, higher yields, and industry-beating returns. BOND's performance is comparatively strong, but still low on absolute terms.

BOND's diversified high-quality holdings, and comparatively strong yields and returns make the fund a buy. BOND's low 2.5% dividend yield means the fund is only appropriate for more conservative income investors and retirees.

BOND - Basics

  • Sponsor: PIMCO
  • Dividend Yield: 2.51%
  • Expense Ratio: 0.57%
  • Total Returns CAGR (Inception): 4.40%

BOND - Investment Thesis

BOND's investment thesis is quite simple, and rests on the fund's:

  • Diversified high-quality holdings, which significantly reduce portfolio risk and volatility. BOND is an incredibly safe, stable investment.
  • Comparatively strong yield and return, which makes the fund a particularly strong choice in its market niche.

BOND seems like the perfect choice for the conservative income investor. Let's have a look at each of the points above.

Diversified High-Quality Holdings

BOND is an actively-managed bond fund. BOND is administered by PIMCO, the most successful and well-known fixed-income investment managers in the world. PIMCO bond funds are almost always strong investment opportunities, and BOND is no exception.

BOND's holdings are quite diversified, but with a strong focus on higher-quality securities and asset classes. The fund currently focuses on Treasuries, mortgage-backed securities, and investment-grade corporate bonds, with smaller investments in other relevant bond sub-asset classes. BOND's diversification reduces portfolio risk and volatility, and is a significant benefit for the fund and its shareholders.

(Source: BOND Factsheet)

BOND's holdings are of very high quality, with strong credit ratings. Over 90% of the fund's holdings carry investment-grade credit ratings, and just under a third are either issued or backed by the U.S. government. Overall credit risk is very low.

(Source: BOND Factsheet)

BOND's high-quality low-risk holdings serve to significantly reduce portfolio risk and volatility, and are a significant benefit for the fund and its shareholders. Expect extremely low losses during downturns and recessions, as was the case during 1Q2020, the onset of the coronavirus pandemic.

Chart
Data by YCharts

As can be seen above, BOND posted losses of just 1.0% during the start of the pandemic, comparatively strong returns. BOND outperformed equities, high-yield and investment-grade corporate bonds, but underperformed relative to broad bond indexes and Treasuries. BOND's holdings do seem to minimize losses during downturns relatively well, but don't expect gains during these.

BOND's share price is reasonably stable, with the fund trading between $100 and $110 a share since inception. Sharp losses are rare and the upwards trend is undeniable, but the volatility does mean that BOND seems like an inappropriate choice for investors looking for cash-alternative funds. Nick Ackerman, a fellow Seeking Alpha contributor, covered some cash-alternative funds here.

Chart
Data by YCharts

BOND's holdings have a weighted average duration of 5.7 years., which is below average for diversified bond funds. BOND's duration means that investors should expect to see moderate losses when rates rise, and moderate gains when rates decrease. As an example, the fund posted losses of 3.23% in early 2021, during which the 10-year Treasury yield rose by about 0.75%. Results are (roughly) consistent with the data.

Chart
Data by YCharts

To summarize, BOND's diversified high-quality holdings reduce portfolio risk and volatility, and are a significant benefit for the fund and its shareholders.

Comparatively strong yield and returns

BOND offers investors comparatively strong yields and returns.

Comparative is the key word.

BOND's 2.5% yield is quite low on absolute terms, but higher than that of bonds in general, Treasuries, and investment-grade corporate bonds. High-yield corporate bonds yield quite a bit more than BOND, but these securities are significantly riskier.

Chart
Data by YCharts

BOND's 4.3% annual returns since inception are also quite low in absolute terms, but higher than that of its benchmark.

(Source: BOND Factsheet)

More broadly, BOND offers returns broadly comparable to those of investment-grade and high-yield corporate bonds, with the risk and volatility (but not the low returns!) of bonds in general. Returns are comparatively strong, risks are comparatively low, a solid combination.

Chart
Data by YCharts

BOND's high yield and industry-beating returns are the product of the fund's strong management team, and consistent generation of alpha. As mentioned previously, PIMCO is the best fixed-income investment manager in the business, with an outstanding performance track-record, and with the strongest, best-performing bond funds in the market. BOND is no exception.

A quick example of the above.

BOND currently sports a duration of 5.8:

(Source: BOND Corporate Website)

Which is slightly below the index's 6.8 figure:

(Source: BND Corporate Website)

BOND's lower duration is an explicit management choice, and is accomplished through the use of interest rate derivatives, swaps, and the like.

(Source: BOND Corporate Website)

BOND's managers decided to reduce the fund's duration as they thought rates would rise. They were right, with the 10-year Treasury rate rising by about 0.65% these past twelve months.

Chart
Data by YCharts

BOND's lower duration meant fewer losses as rates rose, ultimate resulting in industry-beating returns for the fund and its shareholders.

Chart
Data by YCharts

Take a close look at the two graphs above, and you can see actually see BOND outperforming more and more when rates were rising, until about April 2021, and then mostly matching the performance of the index. These results are consistent with BOND's outperformance being mostly driven by the fund's decision to lower its duration.

Importantly, the fund's lower duration was a decision taken by its management team, and it has to be analyzed on those terms. The lower duration is not that important per se. The fact that the fund's management team were able to forecast interest rate movements and position the fund to take advantage of these is important.

BOND consistently outperforms its index through active management, prescient macro forecasts, and savvy security selection. In my opinion, due to BOND and PIMCO's consistently strong performance track-record, the fund will continue to generate alpha in the future, and outperform its peers.

BOND - Leverage Analysis

As an aside, BOND sometimes uses modest amounts of leverage and short positions, as part of the fund's actively-managed investment strategy. Details vary, but a typical trade might be pairing a short position in an overvalued security, and using the proceeds to go long in an undervalued security. Leverage serves to boost risk, returns, and yields, but in BOND's case, the leverage is mostly there for trading / active management purposes.

Conclusion - Buy For the Conservative Income Investor

BOND's diversified high-quality holdings, and comparatively strong yields and returns make the fund a buy. Due to the fund's low 2.5% yield, it is a more appropriate investment for conservative income investors and retirees.

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This article was written by

Juan de la Hoz profile picture
7.02K Followers
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.

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I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was originally published to members of the CEF/ETF Income Laboratory on August 9th, 2021.

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