MINT - NEAR: Yield Goes Vertical To 6%

2023-07-04 07:32:07 ET

Summary

• NEAR is an actively-managed ETF that is focused on NAV preservation.
• We rejected the fund in the past, thanks to far better choices that were available back then.
• With an almost 6% after-expense yield, we think this deserves another look.

The BlackRock Short Maturity Bond ETF (NEAR) portfolio comprises short-term bonds and unlike majority of the exchange traded funds, is actively managed. This means that the fund does not passively track the performance of an index by loading up on the securities that comprise the index. Rather, the securities are selected based on research and analysis of the underlying issuers financial health. The management aims to keep the weighted average maturity of the portfolio as a whole to under 3 years and they have a wide array of securities from which they can choose to build the portfolio. The securities can be of the fixed or floating rate kind and can include government and corporate bonds, mortgage and asset backed securities, foreign securities, municipal bonds, and money market instruments, among others.

Most of the portfolio is USD denominated and the goal is to select securities that are rated investment grade or those that are deemed of equivalent quality by the management team. The most recent numbers show that the portfolio was comprised entirely of investment grade rated issuances.

The purpose of this ETF vehicle is to maximize current income for its unitholders while maintaining a low interest rate risk profile. The latter is a non-issue for this fund with an effective duration of 0.45 years based on the most recently published data on the fund website . What the duration indicates is the extent to which the portfolio value will increase or decrease with a corresponding 100 basis point change to the relevant risk free interest rate. This relationship between the valuation and rates is inverse. NEAR's ongoing aim is to keep the effective duration to a year or less. Investors ability to generate returns goes hand in hand with the level of risk undertaken. Short duration, investment grade fixed income securities do not occupy a very high position in that food chain. The shorter term risk free rates that we are enjoying these days however, do set a competitive floor to the earnings potential from NEAR and similar ETFs.

NEAR's portfolio currently has an average weighted maturity of a little over a year and earns a healthy average yield to maturity of 6.15% on its holdings. The average coupon on the holdings may be 4.15%, however, with the downswing in the fixed income world due to the rise in the interest rates helped the ETF accumulate securities at under par prices, giving it a higher yield to maturity.

NEAR yields 4.47% based on its most recent distribution and current price.

We can see that the distributions are trending upwards and we fully expect them to keep rising and get close to the earnings aka yield to maturity over the next few months. The distributions are from net earnings as some of the incoming funds are utilized to pay expenses for its operation. Being actively managed, NEAR does have a relatively higher management fees compared to its passive peers, and it is 0.25% on an annual basis.

In other words, you should earn about 5.9% in total returns over the next 12 months, all else being equal. The fees have not been a roadblock in this ETF producing positive results since its inception in 2013.

Of course, this picture would have been different before the rates started rising in 2022, before which we were in the era of zero or close to zero rate monetary policies. Which brings us to our prior coverage of this ETF.

Prior Coverage and Current Verdict

We covered it in November 2020 and then revisited it little less than a year later. During our first round of coverage, NEAR was yielding close to half a percent, which was an insufficient reward for the risks of holding it, however miniscule they were. We said,

With funds like NEAR, investors aim to get "something" rather than "nothing". At 0.64%, the gap between something and nothing is down to, well, nothing. NEAR is not alone in this area. Most funds that don't take duration risk and take just a spoonful of credit risk, make about as much. That is the hand you are dealt today. We personally would not take it, but you are welcome to. The key reason for us is that funds are parked mainly to take advantage of opportunities. If you land up losing even 1% during a panic, you have blown through 1.6 years of income. Stick with cash and park it in the blue minivan.

Source: NEAR: What Is A Good Vehicle For Parking Cash

A year later, the story was no different and while NEAR came out ahead of another popular cash parking vehicle, PIMCO Enhanced Short Maturity Active ETF ( MINT ), we still gave both of them a pass and gave three alternatives instead . NEAR did outperform MINT by a small margin during this time frame.

The current scenario is opposite of what it was during our last two passes of this ETF. We recently covered another ETF with a profile similar to NEAR and belonging to the same fund family, the iShares Ultra Short-Term Bond ETF (BATS: ICSH ). This one too is actively managed but impressively charges investors a fraction of fee (0.08%) compared to NEAR. The latter has a slightly higher YTM net of expenses, but it is not material to sway the needle. ICSH navigated the pandemic better and has done slightly better over the last 5 years.

Both have remained close to each other irrespective. Just like ICSH, we think at this point in time, NEAR too could find a small, but well deserved place in a conservative investors' portfolio.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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