USFR - MINT: Credit Risk May Not Be Worth It

2023-04-07 02:56:48 ET

Summary

• MINT attempts to provide better than cash returns with the assumption of some credit risk.
• It has a 30-Day SEC yield of 5.0%.
• With T-bills currently yielding 4.8%, the extra yield pick-up from the MINT ETF may not be worth it for the credit risk assumed.

The PIMCO Enhanced Short Maturity Active ETF ( MINT ) attempts to provide better returns than traditional cash investments while maintaining a short duration profile.

I recommend investors avoid the MINT ETF, as the small pick up in yields compared to ultra-safe 3 month treasury bills may not be worth it at the moment.

Fund Overview

The PIMCO Enhanced Short Maturity Active ETF is an actively managed fund designed to offer higher return potential compared to traditional cash investments.

Within PIMCO's bond offerings, the MINT ETF is considered the lower risk, but with commensurately lower potential returns (Figure 1).

The MINT ETF has $8.3 billion in assets and charges a 0.35% expense ratio.

Portfolio Holdings

The MINT ETF holds over 600 positions with a portfolio effective duration of 0.5 years as of April 4, 2023. Figure 2 shows the MINT ETF's sector allocation. The ETF has 32.4% invested securitized securities like Agency mortgage-backed securities ("MBS"), non-Agency MBS, commercial mortgage backed securities ("CMBS"), and Collateralized Loan Obligations ("CLOs"). It has 46.1% invested in investment grade credits, and 20.5% invested in other short duration instruments (Figure 2).

Figure 3 shows the fund's credit quality allocation. 1.9% of the fund is government backed, 57.4% is investment grade (BBB- to AAA), and the rest are non-investment grade, commercial paper, or not-rated.

Distribution & Yield

As short-term interest rates have risen on the back of the Fed's interest rate increases in 2022, so has MINT's monthly distribution. While the fund has only paid a trailing 12 month distribution of $2.75 or 2.8%, the annualized rate of the most recent quarterly distribution is 4.3% and the fund has a 30-Day SEC yield of 5.0% (Figure 4).

Returns

Figure 5 shows the historical returns of the MINT ETF. The fund has generated very modest total returns of 1.3% p.a. on both a 3 and 5Yr time horizon to March 31, 2023.

Low Risk Does Not Equal No Risk

One clear distinction investors should bear in mind is that although the MINT ETF is marketed as low-risk, it is definitely not 'no risk' . In fact, looking at the fund's holdings (figures 2 and 3 above), one should conclude that the MINT ETF has quite a bit of credit risk, albeit on short-maturity fixed income instruments.

In most instances, if investors are able to hold these securities to maturity, they should be paid back in full. However, during market stress events, credit spreads can spike and these investments may fall below par. For example, during the COVID pandemic, MINT's NAV briefly plunged by more than 5% as credit markets became dislocated (Figure 6).

Another interesting observation is that in 2022, the MINT ETF's NAV declined from $102 to a low of $98, or roughly 4%. This result is surprising as credit markets were generally benign and the fund had low (0.5 Yr) duration exposure, so its NAV should not have declined if its investments were held to maturity.

I suspect what happened was that as short-term interest rates rose in 2022, the MINT ETF suffered small MTM declines in its portfolio holdings due to its 0.5 Yr duration. However, with a portfolio turnover of 100%, the fund was constantly 'churning' its portfolio in order to generate the highest distribution yield possible, which led to the fund realizing the small MTM losses instead of holding the investments to maturity and collecting par.

So although the fund paid investors $1.87 in distributions in 2022 (Figure 7 below, 1.9% year-end yield), the actual total return in 2022 was -1.0% (from figure 5 above).

MINT vs. USFR

For investors with very short-term investment horizons or those that cannot accept any principal losses (saving up to buy a house, for example), the MINT ETF may not be a suitable investment.

In fact, given MINT's mediocre total returns, one has to question whether the extra 'return' is worth the credit risk.

For example, the WisdomTree Floating Rate Treasury Fund ( USFR ) invests in floating rate treasury securities (floating rate treasuries have zero credit risk and minimal duration risk due to its 3 month rate reset feature) and paid a trailing 12 month distribution yield of 2.9% (Figure 8).

However, unlike the MINT ETF, the USFR ETF actually had a positive return in 2022 as its portfolio automatically resets to the 3 month T-Bill yield without churning (Figure 9).

With 3 month treasury bills currently yielding 4.81%, it makes no sense for investors to take on the additional credit risk of the MINT ETF for a small pick up in yield (Figure 10).

For readers who want more information about the USFR ETF, I recently wrote an in-depth article on the fund.

Conclusion

The MINT ETF attempts to provide better returns than traditional cash investments while maintaining a short duration profile. I recommend investors avoid the MINT ETF, as the small pick up in yields compared to ultra-safe T-bill investments like the USFR ETF may not be worth it at the moment.

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