PIMCO transfers actively managed BOND ETF to NYSE trading floor

Why go active for bonds?

According to PIMCO, the median active bond fund has outperformed its passive peers by around 48 basis points (0.48%) per year over a trailing 10-year period. This is in contrast to equities, where the majority of actively managed funds have underperformed their counterparts. 

According to a whitepaper from Fidelity, skilled active fixed-income managers can trade around changes in interest rates, volatility, and the credit environment that passive fixed income funds must otherwise accept and bear the brunt of. 

The theory is that active management works for bonds primarily because skilled managers can exploit inefficiencies in the highly complex and diverse fixed income market. Compared to equities, bonds trade over the counter, which can result in lower transparency, poorer liquidity, and wider spreads. 

Because passive bond ETFs must seek to match the risk and returns of a benchmark index, they're constrained to pre-set, static criteria for fixed income sector exposures, issuers, credit quality, maturity, duration, seniority, and yield curve exposure.

In contrast, active bond ETFs can target each of the criteria mentioned above based on their own outlook, much like how "smart beta" equity funds overweight certain risk factors. This can help them outperform during periods of high market volatility or economic uncertainty. 

PIMCO's BOND ETF

BOND focuses on holding higher-quality, intermediate-duration bonds. Unlike passive bond index ETFs like the popular iShares Core U.S. Aggregate Bond ETF, BOND is able to select fixed-income securities from outside of its benchmark, the Bloomberg U.S. Aggregate Index.

BOND's portfolio is highly diversified, holding a mixture of Treasurys, mortgage-backed securities, investment-grade corporate bonds, and smaller allocations to international developed and emerging market bonds, as well as high-yield bonds. 

Overall, BOND has an effective duration of 6.12 years, making it intermediate in terms of interest rate sensitivity. Currently, the ETF has an estimated yield to maturity of 6.38 as of November 14th. Unlike aggregate bond ETFs, there is a lower government and AAA-rated debt allocation. 

Since its inception, BOND has outperformed both its benchmark and AGG on a total return basis:

A notable exception was in 2022, where BOND sharply underperformed. Personally, I don't think rising rates were the culprit here, as AGG had a similar duration of 6.29 years but lost less. 

I think AGG suffered lower drawdowns because it had a higher proportion of AAA-rated Treasurys and agency bonds, which were less affected by the turmoil in equity markets. In comparison BOND has a higher allocation of lower credit quality holdings. 

BOND has also outperformed AGG over various rolling periods:

This outperformance is net of any fees, which BOND charges more compared to passively managed ETFs due to its active management. Currently, BOND charges an expense ratio of 0.55%, compared to AGG at 0.03%. Higher expense ratios eat up most gross outperformance by active ETFs, so it's impressive that BOND has consistently outperformed net of fees even with a high expense ratio. 

Please note this article is for information purposes only and does not constitute investment advice.