MINT - GSY: Short Duration Bond Fund From Invesco 2.92% Yield

Summary

• With the current bear market resuming its next leg down, it would be prudent for an average retail investor to consider moving their portfolio to a much larger cash allocation.
• The Invesco Ultra Short Duration ETF is a short duration corporate bond fund.
• GSY has a very short duration of 0.69 years but is not credit risk free, with over 70% of the portfolio invested in "BBB" and "A" corporate credits.
• This article covers portfolio allocation from our suite of products - we focus on macro portfolio allocation, CEFs, and yield-generating options strategies, targeting overall yearly portfolio returns of 9%+.

Thesis

With the current bear market resuming its next leg down, it is prudent for an average retail investor to consider moving their portfolio to over 30% in cash (this is what we have done with our portfolio). We do not think that market timing exercises are historically very successful so we shy away from ever entering short positions. We feel that if an investor has identified a risk-off environment the best approach from a portfolio construction perspective is to increase substantially the cash portfolio allocation. While many institutional investors are constrained by fund mandates in terms of how much of the portfolio can be invested in cash-like vehicles, retail investors do not have this restriction. We feel long term the stock market moves up, thus it is best to be either be long, modestly long or neutral. That being said in today's environment there are many alternatives in terms of cash-like vehicles where a retail investor can weather out the storm. Today we are going to look at The Invesco Ultra Short Duration ETF ( GSY ).

As per its literature, the Invesco Ultra Short Duration ETF:

is an actively managed exchange-traded fund (ETF) that seeks maximum current income, consistent with preservation of capital and daily liquidity. The Fund will invest at least 80% of its total assets in fixed income securities of varying maturities, but with an average duration of less than one year.

The fund does indeed have a very short duration of 0.69 years but is not risk free, with over 70% of the portfolio invested in "BBB" and "A" corporate credits. The fund is actively managed, which in our opinion is a good credit mitigant versus a pure passive fund.

Let us have a look at how GSY stacks-up against the competition:

We can see that GSY has one of the highest yields out there, but also a larger than usual expense ratio at 22 bps. We surmise this is the case due to the active management of the fund. The vehicle takes credit risk as we have already identified and a very small amount of duration risk (duration is very low but nonetheless existent versus funds such as BIL as an example). With 3-month T-Bills having risen significantly the competition is fairly good in providing equivalent returns with no credit risk.

We like GSY and feel the fund is compelling and well run. However, in today's environment we are tilted towards just rolling 3-months bills if the time horizon is longer. For an investor in need of the parked cash within the 3-months time-frame GSY is the more compelling choice.

Holdings

The fund has a high Corporates - Financials allocation:

We can see that allocation concentration reflected in the top holdings as well:

The fund does take credit risk with the bulk of the holdings in the "BBB" and "A" ratings bands:

We do not feel the upcoming recession (in our opinion one is coming) will be severe, hence the credit risk run by the fund is not substantial, but at the same time with risk free assets yield on the rise a like-for-like comparison does not flatter GSY.

Performance

The fund is fairly flat on a total return basis in 2022:

On a longer time-frame the fund slowly accretes with the exception of the Covid crisis:

It is interesting to note that during the Covid crisis cash-like vehicles that were entirely focused on Treasuries did not experience any gap down in prices. This is due to the fact that treasuries actually increased in price in the risk-off environment. Conversely vehicles such as GSY which contain corporate bonds experienced substantial gap-down events due to the pervasive fears around corporate defaults.

Conclusion

GSY is a short duration bond fund with a very attractive 30-day SEC yield. The fund takes credit risk via its corporate holdings but has a very short duration of only 0.69 years. The fund has performed as expected in the past year being flat in 2022 (the slight negative duration impact being compensated by the dividend yield). The article benchmarks GSY with other alternatives in the space and 3-months T-Bills. GSY is a very compelling choice for a retail investor looking to park cash for less than three months.

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