MINT - Time To Trade The MINT ETF For A Long-Term CD?

2023-08-18 09:00:00 ET

Summary

• Ultrashort ETFs like PIMCO Enhanced Short Maturity Active ETF are now yielding at levels not seen since the 2008-09 financial crisis, but have they peaked?
• This review provides an overview of the PIMCO Enhanced Short Maturity Active ETF. Strategies are presented for replacing MINT with short or longer-dated CDs.
• For some folks, MINT is a Sell. I rate MINT a Hold for others not wanting the limitations CDs come with.
• For investors with more risk tolerance, two other strategy article links are presented, one using CSP options in place of CDs.

Introduction

After years of low yields, ultrashort ETFs like the PIMCO Enhanced Short Maturity Active ETF (MINT) are finally yielding at levels not seen since the GFC of 2008-09 for ETFs that have such short durations. PIMCO lists MINT's distribution yield (as of 7/31/23) at 5.18%.

Here I will first review the MINT ETF and then address the question asked in the title. With each investor's goals and investment strategy being unique, for those like me with cash to invest we should not need to touch for 2-4 years, the answer to the question asked is Yes. For those investors, that means MINT might need a Sell rating. For those who do not want to risk early withdraw penalties or the need to sell brokered CDs, I give MINT a Hold rating. For more adventurous investors, I include links to articles that explain other strategies to consider.

PIMCO Enhanced Short Maturity Active ETF review

Seeking Alpha describes this ETF as:

The fund invests in U.S. dollar-denominated investment grade debt securities such as bonds and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities that are rated Baa or higher by Moody's, or equivalently rated by S&P and Fitch. The fund invests in securities with dollar-weighted average portfolio maturity of not more than three years. The fund seeks to benchmark the performance of its portfolio against the FTSE 3-Month Treasury Bill Index . MINT started in 2009.

MINT has $9.2b in AUM and comes with 36bps in fees. The TTM Yield is only 3.9%; more on that later. While they list a benchmark, an examination of the holdings clearly shows MINT doesn't invest based on it.

PIMCO provides these insights into their ETF:

• The Fund seeks maximum current income, consistent with preservation of capital and daily liquidity.
• The Fund aims to provide diversification and downside risk mitigation in volatile markets, with little exposure to risk rate risk.
• The Fund offers access to PIMCO's veteran liquidity management team, as well as an extensive credit research process to source what are believed to be the most attractive securities.

Holdings review

Despite the benchmark used, MINT holds very little in US Government debt.

All the Corporate bonds held are investment-grade. The two Futures are USTs that mature in September. Without any Euro currency exposure, I'm not sure why they hold that Forward.

While MINT has a 33% allocation outside the US, all holdings are priced in USDs. MINT holds about 670 assets, with the Top 20 representing 17.5% of the portfolio. The bottom half of the portfolio is only 7.5% of the weight. While PIMCO lists the Effective Maturity at .12 years, only 26% actually mature this year, with some ABS/CLO debt maturing after 2066! Coupon payments and debt prepayments help account for the difference. I calculated the WAC at 5.19% and WA price of $99.27. PIMCO lists the YTM at 6.1%.

Distribution review

With its duration at 40 days, the yield closely aligns with what 3-month T-bills or bonds maturing in that time frame are yielding. As the chart shows, that has both pluses (now) and negatives (post-COVID). The latest payout is down $.02 from the prior month so the 5.18% stated near the top of this article is already stale (4.92% is closer now). Over the past quarter, 3-mo T-Bill yields are up only 20bps, with little upward movement recently. This could foretell a peaking in the yield for MINT.

Seeking Alpha Quant gives MINT an "A" for this factor.

MINT vs. CDs

First, let's see how MINT compares to a 3-month CD since that is the maturity target of the underlying benchmark and a 3-year CD for longevity.

* based on the latest monthly distribution

The rate I quoted is from the Fidelity site for brokered CDs, thus the Various for penalties and Yes for price movement. Unlike buying a CD from your local bank which probably comes with early withdrawal penalties, the only way to exit brokered CDs is to sell them, which is not guaranteed to be possible.

While the yield should climb as rates increase, MINT can suffer price declines, as happened during the COVID crash (fear) and in 2022 (FOMC actions).

One was sharp and probably hard to avoid, the second was as deep but slower to develop. In both cases, the depth approached 2.5%. Assuming one abides by the FDIC protection limits, the biggest risk with a CD is the bank fails and you have to wait for the FDIC to redeem you CDs. Also, if that happens, interest stops accruing on the date of the bankruptcy.

Portfolio strategy

If your strategy for owning the MINT ETF is for instant access to your cash reserve, then one needs to ask "What percent of that right now?". Assuming it is not 100%, the use of a CD ladder should be considered such as buying one (or more) CDs that currently mature in 3, 6, and 9 months and buying a new 9-month CD every three months. Holding multiple CDs for each maturity date might save penalty costs. As the next chart shows, your CAGR from MINT also includes price movement.

PIMCO lists the 1,3,5,and 10-year CAGRs as: 4.4%; 1%; 1.6%, and 1.4%.

If instant access is not required, then the title question really comes into play as the next chart shows 5-year CD rates appear to have already turned.

With CD rates almost flat out to five years, at least using some cash to "lock in" those rates makes sense if rates are already anticipating the top of this interest rate cycle.

Consider this, MINT's YTD CAGR is about 3.7%, its best year ever so far, topping 2019's 3.33% CAGR. Since any price gain seems to get offset by MINT yielding less, investors who want/can lock in a 5% CAGR should consider laddering CDs. One could do some now and wait to buy more, but my best guess is only another 25bps in yield might materialize, 50bps maybe.

Final thoughts

The main purpose of this article was addressing investment options for short-term cash assets. My local bank is offering 4% but only out 18 months; brokered CDs via Fidelity offer more for longer periods, thus the comparison used here. For investors willing to take on some risk, building a bond ladder is an option to consider and is a strategy I use and covered here: Building A 'CD' Ladder Using Baby Bonds . Another strategy I execute is where I have control over most risk factors. It is enhancing the return on your cash held by writing Puts against those assets. My Using Cash Secured Puts, Not CDs article reviewed this strategy.

For further details see: