The PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (NYSEARCA: MINT) is an actively managed, high-quality, ultra-low duration bond ETF designed to replace cash and cash alternatives. While the fund has its merits, falling interest rates caused its dividend yield to drop to an extremely low 0.44%. At this point, the fund only offers investors slightly higher returns than most savings accounts or bank CDs, with more volatility. In my opinion, while the fund is not a bad investment on its own, it does not offer enough benefits to justify an investment. For most investors, leaving their money in the bank is an easier and more appropriate choice, and looking for a particularly attractive CD rate is a better use of their time.

mint basics

• Investment Manager: PIMCO
• Dividend yield: 0.44%
• Expense ratio: 0.36%
• 10-Year Total Returns CAGR: 1.43%

Introducing MINT

MINT is an actively managed, high-quality, ultra-low duration bond ETF. It is administered by PIMCO, the world’s most successful fixed income investment manager. PIMCO bond funds tend to be pretty good, but there’s not much the company can do with yields at rock bottom.

MINT itself invests in investment grade US bonds, focusing on high quality corporate bonds, with a smaller allocation to US Treasuries and the like. The fund currently holds 717 different stocks. The asset allocations are as follows.

MINT’s holdings are almost all short-term securities, with an average maturity of 0.85 years and an effective duration of 0.78 years.

MINT holdings are almost all extremely safe securities. US Treasuries and other government-backed securities effectively have no credit risk: the US federal government is the most creditworthy institution in the world and faces no real risk of bankruptcy. Investment-grade US bonds are also incredibly safe, especially given their short maturities. Companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ: MSFT) do not run any significant risk of default, and if they To do by default, this will almost certainly be a long and laborious process, not something that will happen in the months to come.

Due to the above, MINT should perform reasonably well during downturns and recessions. This was the case in the first quarter of 2020, at the start of the coronavirus pandemic, during which MINT outperformed most bonds, bond asset subclasses and equities. The fund underperformed Treasuries due to a flight to quality effect.

MINT should also do relatively well during periods of rising interest rates, as it did last month. The fund underperformed high yield bonds as these securities tend to trade alongside broader economic conditions, not just rates.

As MINT has virtually no credit or duration risk, the overall volatility and risk are both quite low. The fund tends to trade with a very stable price ranging between $101 and $102. Volatility is low and losses rare and short-lived.

Due to the above, MINT is used by investors as an alternative to low yielding savings accounts, CDs and other similar very low risk assets. The fund is in general a good alternative to these other products, but this is less true today than for most of the fund’s history. Due to the coronavirus pandemic, the Federal Reserve has cut short-term rates to zero. This, combined with a strong economy and government support/stimulus, caused yields on high-quality, short-term corporate bonds to plummet. As MINT focuses on these stocks, the fund’s yield has also collapsed and currently stands at 0.44%, an all-time low.

MINT’s ultra-low dividend yield means the fund does not offer investors significantly higher income compared to cash or most cash alternatives. In my opinion, an extremely safe fund with a +1.0% dividend yield has its uses, and it has for most of MINT’s history. An extremely safe fund with a dividend yield of 0.44% does not, because that is simply not a material return. For more investors, a savings account is simpler, less complicated and safer.

To illustrate the above, I thought it would be interesting to compare MINT’s historical dividend yield with the average 1-year CD rate, a close analogue of the fund. MINT yields 0.30% more than the average 1-year CD rate, the smallest difference in the fund’s history, by far.

It is important to note that the above items are medium CD prices. Different banks have different rates, and sometimes there are special offers. Marcus, the retail arm of Goldman Sachs (GS), offers a special rate of 0.55% for new customers, just like other banks. MINT is fine, but if investors are serious about scalping a few dozen extra percentage points for their cash holdings, there are better choices, at least under current market conditions.

MINT’s paltry 0.44% dividend yield also carries a tiny amount of risk, and the risks, however tiny, seem to outweigh the benefits. MINT’s holdings occasionally experience losses, and these could conceivably outweigh the fund’s paltry return. For example, the fund has lost 0.29% on a total return basis over the past twelve months, due to capital losses related to falling bond prices. These are tiny, but very real losses, and go against the overall investment thesis and value proposition of the fund.

MINT is expected to suffer further capital losses as the Federal Reserve raises rates. These losses are expected to be minimal, as the fund focuses on higher quality, short-term bonds, but could easily outweigh the fund’s dividends. In my view, MINT’s higher dividend yield does not adequately compensate investors for these additional risks.

On a more positive note, the fund should start to see higher dividends as the Federal Reserve raises rates. Since the fund focuses on short-term bonds, it should be able to quickly replace its maturing low-yielding bonds with new, higher-yielding alternatives, which will lead to a rapid increase in dividends. For this reason, I believe the fund will offer investors a significantly higher return and overall value proposition in the months ahead, and could then provide an attractive investment opportunity.

Conclusion – Not a buy at these levels

MINT is a short-term investment-grade bond ETF, which functions as an alternative to cash, savings accounts and similar investment vehicles. The fund’s current dividend yield of 0.44% is not materially higher than that of the fund’s peers, and it does not adequately compensate investors for its increased risk. As such, I would not invest in the fund at this time.