BOND: Strong Bond ETF, High-Quality Holdings, Index-Beating Performance, 3.0% Yield

Summary

  • BOND is a diversified, high-quality bond fund.
  • It offers investors an above-average 3.0% yield, and index-beating returns.
  • An overview of the fund follows.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

The word bonds on wooden cubes with office desktop. Business finance stock exchange

cagkansayin/iStock via Getty Images

The PIMCO Active Bond Exchange-Traded Fund (NYSEARCA:BOND) is an actively-managed, leveraged, diversified bond fund. BOND's investment managers consistently select bonds with above-average yields and returns, but without materially higher risk or volatility. BOND's diversified, high-quality holdings, above-average 3.0% yield, and above-average returns, make the fund a buy.

BOND's high-quality holdings are particularly appropriate for more risk-averse income investors and retirees. More aggressive, yield-seeking investors should consider higher-yielding alternatives. PIMCO has a suite of fantastic high-yield CEFs, all of which yield significantly more than BOND, but are significantly riskier as well. Of these, the PIMCO Dynamic Income Opportunities Fund (PDO) is looking particularly cheap, with a 9.7% discount to NAV.

BOND - Basics

  • Sponsor: PIMCO
  • Dividend Yield: 2.99%
  • Expense Ratio: 0.55%
  • Total Returns CAGR (Inception): 2.96%

BOND - Investment Thesis

BOND's investment thesis is quite simple, and rests on the fund's diversified, high-quality holdings, above-average yield, and above-average returns. These combine to create a strong, high-quality fund, appropriate for more conservative income investors and retirees. Let's have a look at each of these points.

Diversified High-Quality Holdings

BOND is an actively-managed bond fund, administered by PIMCO, the most successful and well-known fixed-income investment managers in the world. In Seeking Alpha retirement circles, PIMCO is best-known for its assortment of high-yield leveraged CEFs, but the company does have other different offerings, including BOND.

BOND itself invests in a diversified portfolio of bonds, focusing on high-quality securities like treasuries, investment-grade corporate bonds, and mortgage-backed securities. BOND also invests in some riskier bonds, including high-yield corporate bonds, but in much lower quantities.

As mentioned previously, BOND is an actively-managed fund, so asset allocations and security selection are both somewhat dependent on the fund's investment management team. From what I've seen, the fund is currently somewhat underweight treasuries, likely due to concerns about rising interest rates. Treasuries have underperformed these past few months, so being underweight said asset class seems to have been the right call, so far at least.

Asset allocations and credit weights are as follows.

BOND Asset Allocation

BOND Corporate Website

BOND Credit Quality

BOND Corporate Website

BOND's diversified, high-quality holdings significantly reduce portfolio risk, volatility, and losses during downturns. As an example, the fund suffered losses of 1.0% during 1Q2020, the onset of the coronavirus pandemic. Losses were extremely low, as expected. Losses were significantly lower than those experienced by most broad-based equity indexes, and somewhere between those of broad-based bond indexes and investment-grade corporate bond indexes.

Chart
Data by YCharts

As should be clear from the above, BOND is a generally safe, high-quality fund, which should almost certainly experience few, if any, losses during any future downturn or recession.

BOND's underlying holdings sport an average duration of 6.2 years, indicating moderate/average interest rate risk. Expect, well, moderate/average losses when interest rates rise, as has been the case YTD. BOND's losses are in the middle of its peers, quite literally so.

Chart
Data by YCharts

BOND's average duration and interest rate risk is not a negative per se, it is an important fact for investors to consider. Other bond funds attempt to reduce interest rate risk, to reduce losses during periods of rising interest rates. BOND mostly does not do this, so investors looking for low-duration funds should look elsewhere.

As an aside, BOND is a leveraged fund, sporting a 1.52x leverage ratio. Leverage almost always increases portfolio risk, volatility, and losses during downturns, but the situation seems somewhat different for BOND. From what I've seen, some of the fund's leverage is canceled out by short positions, and some is used for swaps and other derivatives which might not necessarily increase potential risks. BOND's leverage has not led to increased losses during prior downturns, and it might not lead to increased losses during future downturns either. As such, I do not think that BOND's leverage detracts from the overall quality and safety of its holdings: the fund remains a safe choice, appropriate for more conservative income investors and retirees.

Above-Average Yield

BOND currently yields 3.0%. Although the fund's yield is not particularly high on an absolute basis, it is higher than that of its closest peers, broad-based bond indexes, and investment-grade corporate bond indexes. BOND's yield is quite good for a diversified, high-quality bond fund, a benefit for the fund and its shareholders. The fund does yield quite a bit less than high-yield corporate bond funds, but these are materially riskier funds too.

Chart
Data by YCharts

BOND's dividend will likely see some growth in the coming months, as the Federal Reserve is hiking rates to combat rising inflation. BOND's dividend has already increased twice in the past few months, and is up 8.7% YTD. Further growth is likely, as the fund sports a 30-day SEC yield, a short-term yield metric, of 3.8%, and a yield to maturity, a forwards-based measure of expected returns, of 5.7%.

Chart
Data by YCharts

BOND's 3.0% yield is somewhat above-average for a diversified, high-quality bond fund, and will likely see strong, consistent growth in the coming months, benefitting the fund and its shareholders.

Above-Average Returns

BOND's above-average dividend yield generally results in above-average return for shareholders, at least relative to the fund's level of risk. BOND has achieved annual returns of about 2.9% since inception, vastly outpacing treasuries and bonds in general, matching the performance of investment-grade corporate bonds, but underperforming relative to the high-yield corporate bonds.

Chart
Data by YCharts

BOND's returns are above-average for a fund of its type and level of risk. As an example, the fund outperformed relative to investment-grade corporate bonds during 1Q2020, a recession, and YTD, a period of rising interest rates.

Chart
Data by YCharts

In simple terms, BOND provides investors with the returns of an investment-grade corporate bond fund, the level of risk of a diversified bond fund, and a higher yield than both, a solid combination. In general terms, the fund is superior to most comparable alternatives on most metrics, although not significantly so. It is a good fund, and better than the index, but nothing too spectacular.

Conclusion

BOND's diversified, high-quality holdings, above-average 3.0% yield, and above-average returns, make the fund a buy.

Profitable CEF and ETF income and arbitrage ideas

https://static.seekingalpha.com/uploads/2019/5/2/27546953-15567808556447084.pngAt the CEF/ETF Income Laboratory, we manage ~8%-yielding closed-end fund (CEF) and exchange-traded fund (ETF) portfolios to make income investing easy for you. Check out what our members have to say about our service.

To see all that our exclusive membership has to offer, sign up for a free trial by clicking on the button below!

This article was written by

Juan de la Hoz profile picture
7.09K 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.

---------------------------------------------------------------------------------------------------------------

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.

Follow

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.

Recommended For You

Comments (5)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.