Here’s some good news for investors who have been trying to figure out what to do with their fixed-income money in the face of rising interest rates.
PIMCO Canada recently launched two bond-based ETFs that are well worth considering.
California-based PIMCO (the name is an acronym for Pacific Investment Management Company) is widely regarded as one of the world’s leading bond traders. They have operated a suite of mutual funds in Canada for several years but only entered the ETF market in October with two offerings.
One is the PIMCO Monthly Income ETF (TSX: PMIF). It’s an exchange-traded version of the PIMCO Monthly Income Fund, which has been on the recommended list my Internet Wealth Builder newsletter since October 2013. The fund is managed by Dan Ivascyn, PIMCO’s managing director and group chief investment officer, and Alfred Murata, managing director and portfolio manager.
The fund invests in an international portfolio of high-quality, non-Canadian dollar, sovereign and corporate bonds. About 55 per cent of the fund is in U.S. issues, 11 per cent in Canada, and the rest distributed worldwide. Most assets are in developed countries; however there is a small percentage of emerging markets assets in the mix. The average effective duration of the fund is 2.95 years.
The fund has never recorded a losing year since it was launched in 2011. The five-year average annual compound rate of return to Oct. 31 was 6.39 per cent. The six-month gain was 2.87 per cent, an excellent showing during a period of rising interest rates.
The October distribution from the mutual fund was $0.0409 per unit, bringing the one-year total to $0.89477, including a year-end 2016 distribution of about $0.40 per unit. At a price of $14.40 per mutual fund unit, the one-year yield was 6.2 per cent. However, the large year-end distribution in 2016 distorts that figure. Basing the yield on the current monthly distribution gives us a figure of 3.4 per cent.
The A units of the mutual fund have a management expense ratio (MER) of 1.39 per cent. The ETF has a management fee of 0.75 per cent, which suggests an MER of around 0.80 per cent-0.85 per cent when all costs and taxes are factored in. That is a significant cost differential and suggests that the ETF should over time generate a return that is about half a point higher on average than the A units of the mutual fund.
However, if you have a fee-based account, you should be holding the F units of the mutual fund. They have an MER of 0.83 per cent, so there would be no cost saving in switching to the ETF.
The ETF began trading at $20 and has not moved much off that mark during the short time it has been on the market. The units closed on Nov. 24 at $20.12.
The ETF makes monthly distributions, with the initial full month payment in November of $0.0325 per unit. If maintained at that rate, the annual distribution would be $0.39, which would translate to a yield of 1.9 per cent. That’s a lot less than the mutual fund. However, even though both the mutual fund and the ETF are based on the same pool of assets, PIMCO says that there is a difference in the way distributions are calculated. That means the cash yields may not be the same, although the total return between the F units and the ETF should be similar.
The second ETF being offered is the PIMCO Investment Grade Credit Fund (TSX: IGCF). It is based on the mutual fund of the same name that focuses primarily on U.S. corporate bonds. Manager Mark Kiesel uses a top-down, bottom-up approach with valuation screens to identify what he believes are the most attractive opportunities in global credit markets. The latest one-year return was 5.1 per cent, very good in this difficult bond market.
The fund has a longer duration than the Monthly Income Fund/ETF at 6.63 years. It is also more diversified, with almost 10 per cent of the assets in emerging markets and 8.5 per cent in high-yield credit. The distributions are about half the level of the Monthly Income Fund, at about $0.02 per unit a month.
The ETF will have a management fee of 0.75 per cent, which suggests an MER of around 0.80 per cent – 0.85 per cent.
I like both of these ETFs, but for income investors my preference is the PIMCO Monthly Income ETF because of its higher cash flow and its longer history. Ask your financial advisor if they are right or your account.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.