MINT: Holding Up Nicely (NYSEARCA:MINT)

Thesis

PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (NYSEARCA:MINT) is a short-duration bond fund that many investors look at as a money market fund due to its historic stability and enhanced yield profile. The fund invests in investment grade bonds, securitized products (investment grade only), and government securities. In order to enhance the fund’s dividend yield, MINT buys slightly longer-dated instruments, meaning it is subject to interest rate risk (as rates move up, the fund asset prices move down). The current fund duration is 0.85 years.

With the 1-year treasury rate at 2% and corporate spreads at the top of their historic trading range (10 years range for non recessionary periods), we feel most of the rates move is now behind us. We are of the opinion that the Fed is going to target a 2.5% neutral rate, with 50bps hikes in June and July followed by a period of observation. The Fed rhetoric is now changing to potentially a rate hike pause at the September meeting. Financial conditions have been tightening, with rates higher, stocks down, and corporate bond spreads wider. The market has front-run the Fed, and we feel the move higher in rates is almost over.

MINT currently exhibits a 1.78% 30-day SEC yield and given its duration profile it will tread water for the next 3-4 months. While nicely insulated from much wider corporate spreads given its duration profile, it will slightly be negatively impacted as front rates move to 2.5%. A retail investor considering the vehicle would do well to re-visit the name in the beginning of September, while investors concerned about an incoming recession would be well suited to visit treasuries ETFs such as the iShares 1-3 Year Treasury Bond ETF (SHY) and the Schwab Short-Term U.S. Treasury ETF (SCHO). We therefore rate MINT as a Hold.

Dividend Yield vs 30-day SEC Yield

Dividend Yield

Usually financial websites show a trailing 12-months dividend yield when reporting this metric. For example, if you look at MINT on Seeking Alpha, you will notice that the dividend box shows a 0.56% ratio – when looking into the details of how this is calculated (go to the Dividends tab – Dividend History) and you will notice that this metric is actually calculating by adding the dividends paid out in the past 12 months and then annualizing that figure as compared to the current fund market price. In a stable interest rate environment, this metric is suitable, but in an increasing / decreasing interest rate environment, looking at this analytic would be very misleading (as rates go up, the dividend yield would be understating what you are getting for example).

30 Day SEC Yield

This is the best metric when analyzing a short duration bond fund, given the current interest rate environment and the propensity for some funds to have a roll effect in their bond holdings, where the discount to par is being absorbed by the maturity pull and higher yielding bonds are bought. This creates an effect of having a much higher 30-day SEC yield when compared to a trailing 12 months dividend yield. The 30-day SEC yield is the best metric to look at when considering short duration bond funds because it gives you an accurate snapshot of what cash you are actually going to receive based on where the portfolio currently is, and where the market price clears.

Holdings

The fund invests exclusively in investment grade rated securities:

We can see from the above distribution graph that the fund has a bit of a barbell approach, where we have a significant allocation in AAA and AA buckets, followed by a similar allocation at the bottom of the investment grade spectrum, namely in BBB buckets. This allocation is the main yield enhancement vehicle for the fund, with lesser-rated investment grade credits yielding more than the safest securities.

The fund invests across three main sectors:

Investment Grade Credits is the largest bucket, and it represents corporate credits with very short duration. In the Securitized bucket, we are going to find senior tranches of securitizations which offer low-weighted average lives and an investment grade rating.

Performance

MINT has held up nicely in 2022, being down only -1.55%:

While we have seen carnage in 2022 for any type of fixed income instrument, MINT has held up nicely due to its very short duration profile and ability to “roll” duration as bonds mature. All else equal, we would expect the fund to pull to a zero total return for 2022 from its dividend yield if rates now normalize.

A 1-year total return picture paints a similar story, with the fund down very marginally through what has been a truly historic and violent reset higher in rates:

Conclusion

MINT is a short duration bond fund that contains a mix of treasuries, securitizations, and investment grade bonds. With a low duration of 0.85 years, the fund has weathered quite nicely the 2022 duration carnage in fixed income brought on by higher rates. With a 1.78% 30-day SEC yield the fund has not yet surpassed the 2% dividend yield threshold but it will do so as its portfolio is rolled into new credits. While front end rates will move from the current 2% level to 2.5% in our opinion, the impact to MINT will be only modestly negative.

A retail investor considering the vehicle would do well to re-visit the name in the beginning of September, while investors concerned about an incoming recession would be well suited to visit treasuries ETFs such as the iShares 1-3 Year Treasury Bond ETF (SHY) and the Schwab Short-Term U.S. Treasury ETF (SCHO). We therefore rate MINT as a Hold.