MINT - MINT: Careful This May Leave A Bad Taste

Summary

• MINT is potentially one of the most deceiving ETFs we cover.
• It masquerades as a "safe, short-term bond fund," but we think there's more to the story. Much more.
• MINT's holdings contain a significant number of potentially "breakable" bonds, which just haven't broken yet.
• All the while, investors think they are getting a money market-like ETF.
• We rate MINT a Sell, because short-term bonds don't have to be this complex, especially now.

By Rob Isbitts.

Summary

PIMCO Enhanced Short Maturity Active Exchange-Traded Fund ( MINT ) looks, at first glance, to be a big, popular cash-equivalent-type fund, with a historical risk profile that would help an investor sleep at night. That type of exchange-traded fund ("ETF") is getting more attractive by the day, amid a spike in short-term interest rates and a volatile, range-bound stock market. Yet there's a lot more to MINT than meets the eye, and that's why we rate it a Strong Sell, even at a time when its peer group should be in the spotlight for many positive reasons.

But MINT is a different animal, and what might have helped it grow to nearly $10B in assets, and trade about $160mm a day might be a lurking set of previously unseen risks. As you might hear in a horror movie, "The danger is coming from inside the house!" Allow me to explain.

Strategy

PIMCO's description of the fund emphasizes things like the pursuit of "maximum current income, consistent with preservation of capital and daily liquidity." That has largely been accomplished in the past. The ETF maintains a duration of under one year and tries to pursue its objectives by a combination of different fixed income security types. MINT benchmarks itself to 3-month U.S. Treasury Bills.

Proprietary ETF Grades

• Offense/Defense: Defense

• Segment: Cash & Bonds

• Sub-Segment: Short-Term Bonds

• Correlation (vs. S&P 500): Very Low

• Expected Volatility (vs. S&P 500): Very Low

Holding Analysis

MINT is an active ETF. So, as opposed to one that simply aims to replicate the return of Treasury Bills, 1-3 Year Treasury Notes, or some other near-cash instrument, MINT tries to add value by extending its portfolio into areas that investors may not realize. This includes a significant allocation to bonds rated BBB (28% of assets) and un-rated bonds (23%). Only 6% of the ETF's holdings are U.S. Treasuries. 27% of the fund is invested in non-U.S. bonds.

Strengths

If you are looking for a shot to beat the return of short-term Treasuries by a little bit, MINT gives you that shot. It allocates based on PIMCO's bond market outlook, so you do get a behemoth bond manager looking over this, rather than simply tracking an index. And, as noted above, its only blemish performance-wise was during the pandemic crash of 2020, when its allocation to lower credits produced a rapid drawdown of nearly 5%. That doesn't sound like much, but for a fund like this, it was likely a shock to the system of its investors at the time.

Weaknesses

While I acknowledge the strong history of this ETF, I believe the times we live in now make it a much riskier venture than in the past. The bond market just does not function the way it used to. Investors found out this year what folks did not realize unless they invested through the 1970s - bonds can be every bit as volatile as stocks when interest rates rise. And, while MINT's low duration and bond maturity structure should limit the damage should the credit markets seize up as they have twice in this century (2008 and 2020), I feel comfortable saying about this collection of bonds: never say never.

Opportunities

MINT is OK if the bond market is OK. It is in position to reap a higher yield and potentially some profits on top of that yield from a rebound in the type of bonds it owns. In particular, if the U.S. Dollar's dramatic ascent reverses, that chunk allocated to non-U.S. short-term instruments could win in two ways (price and currency appreciation).

Threats

However, the weight of the evidence for me comes down strongly on the "threats" side of MINT. Not only can those seemingly mellow holdings turn sour in a bond market implosion, the simple lack of liquidity in credit bonds is a warning sign for ETFs like this one. What many investors do not realize is that a large portion of the BBB-rated bond market is inflated. In other words, the rating agencies have been hesitant to downgrade them to junk, which many of them probably are. So, for a fund that tries to beat the 3-month T-bill, MINT appears to be trying to do it via a "make or break" approach.

The bigger, more obvious issue right now is this: why bother? With U.S. Treasury rates at the short end of the yield curve having flown higher (by over 1,000% since early this year), do investors need to venture out beyond what is generally considered the least-risky bond type?

As with much bond investing today, the biggest threat may be investor misperception. I fear there are many MINT holders with a false sense of security because either through the sales pitch of a broker or on their own, they convinced themselves that this ETF was "like cash, but with a higher yield." No such thing!

Proprietary Technical Ratings

• Short-Term Rating (next 3 months): Strong Sell

• Long-Term Rating (next 12 months): Strong Sell

Conclusions

ETF Quality Opinion

MINT is big, well-backed by a giant bond manager, and has a strong history. That means that in the right type of market environment, it can potentially be useful. But in this environment, I'm saying no. No free lunches, especially in bonds, especially in 2022. Go for the gusto if you like. But know what you own.

ETF Investment Opinion

With so many now-high-yielding short-term bond funds that don't take the contemporary risks this one does, I cannot rationalize owning this one now, no matter how well it may ultimately perform. The risks are not at all worth taking. The only thing worse than losing a lot of money on stocks or long-term bonds is losing money on what you thought was "cash-like." So, with my typical risk-managed bent, I vigorously rate MINT a Strong Sell.

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