Monty Rakusen
The PIMCO Active Bond ETF (NYSE:BOND) invests across a diversified selection of investment-grade debt securities to generate current income and long-term capital appreciation.
Compared to more typical indexed bond funds, the attraction with PIMCO’s BOND exchange-traded fund (“ETF”) is the strategy’s actively managed approach providing the portfolio manager some flexibility to adjust market exposures and potentially deliver excess returns.
Indeed, with a track record since 2012, BOND has outperformed benchmark ETFs like the Vanguard Total Bond Market ETF (BND) or the iShares Core US Aggregate Bond ETF (AGG) historically with a similar risk profile. Over the past year, BOND has returned 4.2% compared to 3% from BND and AGG.
So could the BOND ETF be a good addition to your portfolio? Here’s what you need to know.
What is the BOND ETF?
The BOND ETF is offered by Pimco Investment Management, a globally recognized institution with a strong record of expertise in fixed income. PIMCO describes its investing philosophy as combining a top-down approach considering macro forces expected to play out over the next several years along with a bottom-up strategy utilizing fundamentals in security selection.
source: PIMCO
BOND focuses on high-quality U.S. dollar-denominated bonds with an intermediate-term maturity profile. Its investing universe includes not only U.S. Treasuries but also securitized instruments such as agency-mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), collateralized loan obligations (“CLO”), as well as investment-grade corporate credit.
source: PIMCO
BOND vs BND and AGG
Without trying to reinvent the wheel, the BOND’s strategy can be described as having a balanced risk profile within fixed-income, meaning there is some credit and interest-rate risk, but the overall exposure is intended to generally reflect the high-level themes in the bond market.
That dynamic is evident as the ETF utilizes the “Bloomberg U.S. Aggregate Bond Index” as its performance benchmark, deviating from its exact composition with adjustments the portfolio manager believes are appropriate in the context of the current market environment.
In this case, the same Bloomberg Index is tracked by two of the largest bond ETFs by assets being Vanguard’s BND and AGG from iShares. By this measure, we can think of BOND as a comparable or alternative option compared to these more widely-held funds.
The first metric that stands out is that BOND with $4.3 billion in AUM is significantly smaller than BND with $312 billion in assets or AGG at $109 billion. At the same time, its size is big enough that trading liquidity is not an issue.
With a similar credit risk exposure based on the same benchmark, all three funds have an average or effective duration of around 6.0 years, reflecting the intermediate-term maturity profile of holdings.
On the other hand, BOND charges a materially higher expense ratio at 0.58%, compared to BND and AGG at just 0.03% as low-cost funds. Still, that premium could be justified considering the active management and history of delivering a greater return.
PIMCO Active Bond ETF (BOND) Vanguard Total Bond Market ETF (BND) iShares Core US Aggregate Bond ETF (AGG)
Assets under management $4.3B $311.7B $108.9B
Expense ratio 0.58% 0.03% 0.03%
Treasuries exposure 42% 47% 43%
Avg/Effective Duration 5.6 years 6.0 Years 6.0 years
SEC Yield 5.4% 4.7% 4.7%
Dividend Payout monthly monthly monthly
1YR Total Return 4.2% 3.0% 2.9%
5YR Total Return 1.0% 0.3% 0.1%
10YR Total Return 19.4% 14.9% 14.7%
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Over the past 10 years, BOND has returned 19.4% compared to a 15% return from BND and AGG. The outperformance is even greater since the fund’s inception date in 2012. This spread can likely be attributed to BOND’s ability to deviate from the benchmark risk exposure by taking on more credit or interest rate risk at the margin during a certain period.
That flexibility in the actively managed strategy may also explain the higher annualized 30-day SEC yield, listed at 5.4% for BOND compared to 4.7% in BND and AGG.
It appears the strategy capitalized on the strong bull market in bonds from the last decade amid the low-interest rate environment, while its ability to outperform significantly has been limited in recent years amid the historic volatility since 2022.
What’s Next For BOND?
The upside for BOND from here starts with a path for interest rates to stabilize or even decline as a potential tailwind for the bond market going forward. There is some uncertainty on how inflationary trends will evolve over the next several months, but there are good indications the Fed will have room to start cutting rates over the next year as macro conditions normalize.
We believe this backdrop should be positive for fixed-income as an asset class where the PIMCO Active Bond ETF would be well-positioned to benefit.
The caution here is that there are still risks facing the bond market that could result in renewed volatility and a loss of value for the BOND ETF. A scenario where inflation remains elevated or re-accelerates higher whether this year or into 2025 could force the Fed to consider a new round of rate hikes.
The yield curve could also be exposed to a steepening where the long-end climbs even short-term rates trend lower. Market concerns related to fundamental issues such as a persistent U.S. government budget deficit and the climbing national debt have the potential to impact bonds negatively.
Final Thoughts
Overall, the BOND ETF has proven capable of successfully navigating different market environments and we expect that to continue.
Despite a higher expense ratio compared to low-cost bond ETFs, BOND’s wider dividend yield and potential for incremental excess returns could be worth it. We believe this is a high-quality bond fund most investors can consider as a long-term core portfolio holding.
