Many bond strategists are cautious about high-yield debt these days. It’s fully valued, they say, relative to other pockets of the fixed-income market. But the Pimco 0-5 Year High Yield Corporate Bond ETF (HYS) has been a standout among exchange-traded bond funds in the Kiplinger ETF 20 in recent months.
HYS has held up well since the start of the year, and its 8.8% return over the past 12 months outpaced 59% of its high-yield bond fund peers, as well as the Bloomberg U.S. Aggregate Bond Index. (All returns are through April 30.)
The ETF’s tilt toward short-term debt and its robust 6.4% yield helped. Pimco 0-5 Year High Yield boasts a short, two-year duration (a measure of interest rate sensitivity). That has been a plus in recent months as rates have inched up amid a multitude of worries, including the war in Iran and persistent inflation, says comanager David Forgash.
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Bond prices and interest rates move in opposite directions; a two-year duration implies that if interest rates rise by one percentage point, the ETF’s net asset value will fall by 2%. Sizable exposure to the energy sector, one of the top-performing junk sectors over the past year, has also been a boon.
HYS fund managers have a smart investing strategy
This Pimco ETF is technically an index fund, but its four comanagers combine proprietary quantitative models and the firm’s big-picture views to actively select sectors and bonds for the portfolio to outperform the benchmark.
“It’s about getting ahead of the market,” says Forgash, adding they also “dig in deep,” researching the securities they invest in to “avoid potential blowups.”
Recently, the managers have been buying selectively in battered industries, including software, which cratered amid artificial-intelligence disruption worries, and building materials, which declined as rising construction costs and affordability concerns weighed on investor confidence in the sector earlier this year.
Over longer hauls, this short-term high-yield fund outpaces its peers. Its five-year return, 5.1% annualized, beat 92% of its competition.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.