JAAA - MINT Is Good But JAAA Is Better

2023-11-09 14:32:27 ET

Summary

• PIMCO Enhanced Short Maturity Active Exchange-Traded Fund ETF, a short-term bond ETF, has achieved positive returns and outperformed other fixed-income asset classes since early 2023.
• Other funds, including Janus Henderson AAA CLO ETF, have performed even better.
• An overview of the MINT ETF, and at some alternatives, follows.

I last covered the PIMCO Enhanced Short Maturity Active Exchange-Traded Fund ETF (MINT), a short-term, investment-grade bond exchange-traded fund ("ETF"), in early 2023. In that article , I argued that MINT's diversified holdings, low credit and interest rate risk, and good yield, made the fund a buy. MINT has achieved positive returns since, outperforming most other fixed-income asset classes. Fundamentals have slightly improved since as well, due to higher interest rates.

Although MINT remains a reasonably good investment opportunity for more conservative, short-term investors, I think that the Janus Henderson AAA CLO ETF ( JAAA ) is much stronger. Both funds have comparable credit and interest rate risk, but JAAA yields a bit more, with a 6.7% SEC yield compared to 5.6% for MINT. Total returns are stronger too, drawdowns lower. Although there is nothing inherently wrong with MINT, JAAA seems stronger, so I prefer the latter.

MINT - Basics

• Investment Manager: PIMCO
• Dividend Yield: 4.59%
• SEC Yield: 5.54%
• Expense Ratio: 0.35%

MINT - Overview and Analysis

Holdings and Portfolio

MINT is an actively-managed ETF. It focuses on short-term investment-grade bonds, with sizable allocations to MBS, CDs, and similar short-term investments. Asset allocations are as follows.

Besides the above, MINT also invests in certain derivatives and forwards. These vary, but most seem to focus on hedging risk, including currency and rate risk.

MINT invests in over 700 different securities, with very few non-government issuers accounting for even 1.0% of its portfolio. The fund seems reasonably well-diversified, but definitely less than most bond index funds.

Credit Risk

MINT's underlying holdings are almost all reasonably safe, low-risk securities with strong credit ratings. These sport a median rating of A, indicative of issuers with solid financials, balance sheets, and the capacity to fulfill their financial obligations during almost all economic conditions or scenarios.

A sizable portion of the fund's holdings do not have credit ratings. From what I've seen, these tend to be either securitized products or issued by government-sponsored entities. Risks tend to be low, although we do lack precise credit ratings on these securities.

On the other hand, treasuries tend to post gains during downturns, due to a flight-to-quality effect, and due to (likely) Federal Reserve cuts. MINT performs quite well during downturns and recessions, but other fixed-income securities perform even better.

MINT's overall credit quality is quite good, but lower than that of some of its peers. This includes JAAA, one of my top choices in this space. JAAA focuses on AAA-rated collateralized loan obligation, or CLO, tranches, with small allocations in AA and A.

JAAA is a relatively young fund, so we do not really know how it performs during a downturn. Still, I would expect very low losses, due to its strong credit quality.

Interest Rate Risk

MINT focuses on very short-term securities, with an average effective maturity and duration of just 0.02 years, effectively equivalent to zero.

Both figures seem lower than expected, with even T-bills having higher average maturities. This is likely due to investments in derivatives and forwards.

In any case, MINT's duration is much lower than that of most bonds and bond sub-asset classes.

Lower duration means lower interest rate risk / exposure, leading to above-average performance when rates rise. MINT has significantly outperformed since early 2022, when the Fed started to hike, as expected.

Lower duration should also lead to weak, below-average returns when interest rates decrease. Excluding the pandemic, rates last decreased in 2019, during which MINT underperformed, as expected.

MINT's low duration reduces portfolio risk and volatility, and is a net benefit for investors. More dovish investors might disagree.

Although MINT's duration is lower than average , several short-term and most variable rate funds also have more or less zero duration, including JAAA.

JAAA also outperforms when rates rise, as has been the case since early 2022. It has performed better than MINT too, with a bit more volatility.

Dividend Analysis

MINT's dividends are, overall, reasonably good. Dividends are slightly above-average, quite good for a fund with very little credit risk and effectively zero rate risk. The fund yields a bit more than T-bills, its closest peers.

Of the metrics above, I think that the 5.5% SEC yield is most indicative of the income that investors should expect moving forward. Traditional dividend yields take into consideration dividends paid in the last twelve months, and both rates and dividends were much lower twelve months ago. SEC yields are calculated based on last month's generation of income, and so are much more recent, informative metrics.

On the other hand, JAAA yields a bit more than MINT.

Performance Track Record

MINT's overall performance track-record is reasonably good too. The fund tends to outperform relative to most bonds, and those bond sub-asset classes with roughly comparable credit risk. It does tend to underperform high-yield bonds, but these are much riskier securities. Long-term returns are quite low on an absolute basis, as rates and dividends were much lower in the past. Returns have been much higher these past twelve months, due to past Fed hikes.

Future returns are strongly dependent on future Fed policy. As things stand, investors should expect returns in the 5.0% - 7.0% range. Significant rate cuts would lead to much lower returns, however. A return to ZIRP would collapse dividends and returns to around 1.0%, consistent with fund returns in prior years.

MINT has significantly underperformed relative to JAAA since inception, and for most relevant time periods.

I've been comparing MINT to JAAA throughout the article, and it seems quite clear that MINT is weaker in most areas, stronger in few. MINT has more credit risk, a lower yield, and lower total returns, effectively equal interest rate risk. JAAA does have more volatility:

but volatility remains low on an absolute basis, and much lower than average:

and drawdowns are lower:

Overall, JAAA seems stronger than MINT.

Conclusion

PIMCO Enhanced Short Maturity Active Exchange-Traded Fund ETF is a diversified bond ETF focusing on short-term investment grade bonds. Although there is nothing inherently wrong with the MINT fund, it compares unfavorably to JAAA on most key metrics. As such, I would focus on JAAA over MINT.

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