Update: PIMCO Short-Term High Yield Corporate Bond Index Source UCITS ETF

Dieser ETF setzt auf US-Hochzinsobligationen mit kurzen Restlaufzeiten. Eine Besonderheit ist, dass die Bonds bis zur Endfälligkeit im Index verbleiben, was der Liquidität gut tut.

Jose Garcia-Zarate 17.10.2014

Rolle im Portfolio

The PIMCO Short-Term High Yield Corporate Bond Source UCITS ETF offers investors exposure to the short-to-medium maturity segment (0-5 years) of the USD-denominated market of non-investment grade corporate debt. 

Irrespective of maturity, gaining exposure to the high yield corporate bond market is often thought of as a way to generate higher returns relative to better credits or similar returns to equity. The trade-off is that of higher notional risk vs. investment-grade corporate debt. This means that expectations for a steady stream of income should be lower while the risk profile will be higher. Having said that, the ETF’s maturity limitation effectively curbs these risks. 

The combination of yield pick-up and a higher risk profile means that this ETF is probably best deployed as a satellite component within the fixed income section of an investment portfolio. Aside from curbing volatility, the short maturity focus of the ETF can also be seen as having a duration-management tactical use within a portfolio, particularly so at times of expected rising interest rates. 

European investors considering this USD-denominated ETF should account for foreign exchange effects on returns. This ETF is offered both in an unhedged and Euro-hedged version. In addition, investors would be advised to keep track of monetary policy decisions undertaken by the US Federal Reserve and the effect these may have on the value of this fixed income investment. 

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Fundamentale Analyse

The USD-denominated high yield bond market has experienced significant growth over the past few years. Figures from the Securities Industry and Financial Markets Association (SIFMA) show that high yield bond issuance in the US in 2013 (note – this accounts for around 90% of global USD-denominated high yield bond issuance) hit a historical high of USD 335bn. Meanwhile, issuance in Q1-Q3 2014 has totalled USD 250bn.  

This substantial increase in high yield bond issuance has been supported by an economic environment of ultralow interest rates. This has boosted investor demand for fixed income asset classes away from the very safe but very low-yielding investment propositions that US Treasuries have become. 

The increase in the recourse to the open market at low interest rates has allowed many non-investment grade corporations a relatively easy source of funding over the past few years. In many cases, this funding has been to refinance existing debt commitments. As a result, we have seen an extension of debt maturities that has been instrumental in the remarkable decline rates of defaults in the high yield bond market. 

Despite the noted increase in supply, demand for USD-denominated high yield bonds has regularly outstripped it. This has led to a considerable compression in yields. We have also seen narrowing of credit spreads (i.e. the yield difference to US Treasuries). However, all things considered, the US high yield bond market continues to offer a tasty pick-up over US Treasuries.

In the meantime, the US high yield bond market in the US remains well supported against a backdrop of ultralow interest rates and historically low default rates. However, the path of least resistance for bond yields only points north. Financial markets are already pricing in the normalisation of US monetary policy throughout 2015 and beyond. Fed Funds have been held in a 0.00-0.25% target range since December 2008. Any increases in interest rates are likely to be very gradual and towards a level below the pre-crisis highs. In any case, this change in policy should weigh on US fixed income valuations. 

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Indexkonstruktion

The BofA Merrill Lynch 0-5 Year US High Yield Constrained Index measures the performance of short-term USD-denominated non-investment grade corporate debt issued in the US market. Eligible securities must have a minimum of 18 months to final maturity at the time of issuance in order to be included in the index. Bonds with maturity below one month at the time of rebalancing are dropped off from the index. The minimum outstanding required is USD 100mn. In addition, all issuers must be located in or have substantial business operations in investment grade rated countries that are members of the FX-G10 or territories of the US or Western Europe. Individual index constituents are weighted by market capitalisation. The index then applies a cap of 2% to each issuer and adjusts the face value of the issuer’s bonds on a pro-rata basis. In the event that there are fewer than 50 issuers in the index, each is equally weighted. The index is rebalanced monthly on the last calendar day of the month. Coupon payments received between rebalancing dates are retained in the index on a non-interest earning basis and then are removed at the next rebalancing.

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Fondskonstruktion

The PIMCO Short-Term High Yield Corporate Bond Source UCITS ETF is managed by PIMCO Global Advisors Limited. As of this writing, the ETF’s portfolio manager is Vineer Banshali. PIMCO employs physical replication to replicate the performance of the underlying index. This is a USD-denominated ETF which is offered in both an unhedged and Euro-hedged classes. The ETF distributes dividends on a monthly basis. Cash coupon payments at the fund level are handled in accordance with index rules. The ETF primarily invests in securities that are included in the index’s basket or in derivative instruments (e.g. CDS) that provide indirect exposure to the benchmark. In addition, the manager may also invest in cash and/or fixed income securities that are not part of the index, as long as they mirror its key risks characteristics. However, according to our research, holdings of non-index components rarely exceeds 10% of the fund’s value. The average portfolio duration of the ETF should correspond to that of the index. PIMCO Source discloses the daily composition of the ETF portfolio, including a breakdown by asset type, maturity, country exposure and credit rating, on its website. PIMCO Source ETFs do not engage in securities lending.

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Gebühren

The total annual expense ratio (TER) is 0.55% for its unhedged version and 0.60% for its Euro hedged version. This is at the top-end of the TER range for ETFs providing exposure to the high yield corporate bond market. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares. There are also rebalancing costs whenever the index changes composition.

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Alternativen

As measured in AUM terms, the PIMCO Source ETF is market leader in the provision of exposure to the short-to-medium segment of the USD-denominated high yield corporate bond market. 

Alternatives from other ETF providers lag in AUM by a substantial measure, although they levy comparatively lower TERs. These are the SPDR Barclays 0-5 USD High Yield Bond ETF (TER 0.40%) and the iShares USD Short Duration High Yield Corporate Bond ETF (TER 0.45%). Both are physically replicated. The SPDR fund tracks a Barclays index, while the iShares fund tracks a Markit iBoxx benchmark. Both measure the performance of the 0-5 year segment of the market.

Investors not wanting to restrict exposure to the shorter segment of this market may consider the iShares USD High Yield Corporate Bond (TER 0.15%). This ETF tracks an index including bonds with maturities ranging from 1.5 to a maximum of 15 years. 

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Über den Autor

Jose Garcia-Zarate  is an ETF analyst with Morningstar UK.