PIMCO Enhanced Short Maturity ETF: It’s Liquid, Safe And Avoidable – PIMCO ETF Trust – PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (NYSEARCA:MINT)

Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won’t grow any faster than the rate of inflation. ~ Suze Orman

Investing in the PIMCO Enhanced Short Maturity ETF (MINT) fetches a very small return and has a minuscule element of risk attached to it. The fund invests in extremely short-term dollar-denominated investment-grade debt securities issued by public and private sector organizations rated Baa or higher.

I’m neutral on PIMCO Enhanced Short Maturity ETF (MINT) – and my suggestion is to avoid it in this era of uncertainty and falling interest rates. That said, the fund is better placed than short-term government bonds. The current short-term treasury yields are pegged at 0.45% (3-month), 0.37% (6-month), and 0.38% (12-month)MINT’s current distribution yield is 1.85%.

The ETF’s NAV has been flat since inception and it is intended for a certain type of investor. I’ll elaborate on this a little later.

Image Source: PIMCO website

Holdings

54.39% of MINT’s funds are parked in dollar-denominated investment-grade securities issued by corporates, while 22.25% are invested in securitized instruments such as mortgage-backed securities, collateralized debt obligations, and asset-backed securities.

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Image Source: PIMCO website

16.45% of its holdings are invested in other short-duration instruments (short-term derivatives such as Eurodollar futures). The balance is parked in government securities and emerging market instruments.

MINT – Pros

1. MINT fetches a better rate of return as compared to checking accounts and savings accounts. It also pays higher than short-term government securities. If you have surplus cash, MINT can come to the rescue.

2. MINT is extremely liquid – it’s almost like holding cash.

3. Investing in the fund for the short term helps stock market investors sail through periods of extreme volatility – like we are witnessing now.

4. It helps in capital preservation.

MINT – Cons

1. Ultra-short bond ETFs typically attract hedgers seeking protection from rising interest rates. When interest rates start climbing, these ETFs can liquidate older instruments and move on to those with a higher rate – so it pays off to some extent. However, when rates are falling – like they are now – such funds end up chasing bonds with lower interest rates, impacting their performance.

2. MINT’s return is just 1.85% and the NAV has been almost flat since its inception. The ETF works only for: (A) entities that need to park surplus cash in extremely liquid assets, (B) those who would like to snake in and out of the equity markets because of volatility, and (C) short-term government bond investors.

3. Any ultra-short bond ETF’s performance is weighed down by fees and taxes. MINT’s fees work up to 0.36% and it presumes a tax rate of 35%. If you take into account the current rate of inflation at 2.5%, MINT’s real rate of return falls into negative territory. And I’m not talking about trading costs, those add up too.

4. 54.39% of MINT’s funds are invested in investment-grade corporate bonds and there’s a black swan called COVID-19 that’s just landed. I’m not saying companies will default – but who knows.

Peer Comparison

MINT’s peers are the iShares Short Maturity Bond (NEAR), the JPMorgan Ultra-Short Income (JPST), and the iShares Ultra Short-Term Bond ETF (ICSH).

Investors that bought any ETF from this group in 2015 have gained up to 1% on account of price appreciation. The 4-year average dividend yield is 1.89%, at the maximum.

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Image Source: Seeking Alpha

Let’s put two and two together – investors who picked up any ETF from the peer group 5 years back have made a maximum of 2.10% per year on account of dividend and price appreciation – and the average inflation rate in the US for the last 5 years is 2.18%. It just doesn’t work out at all.

Summing Up

Investing in MINT makes sense only for a certain class of investors. It’s not designed for the regular investor.

If you have surplus cash and want to make something on it, or if you want to hold on to liquid assets till market volatility peters out, consider investing in MINT. Otherwise, it’s an ETF to avoid – and my rating is neutral.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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