June 27, 2011 by Ron Rowland

PIMCO expanded its fixed income ETF menu with the June 17, 2011 introduction of PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS) .  HYS will attempt to replicate the price and yield performance of the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index using PIMCO’s “smart passive” approach to indexation.

The underlying BofA Merrill Lynch 0-5 Year US High Yield Constrained Index (registration required, index ticker = HUCD) tracks the performance of short-term U.S. dollar denominated, below-investment grade corporate debt issued in the U.S. market.  Allocations to an individual issuer will not exceed 2%.  The index currently has 787 constituents, an effective yield of 7.5%, and a duration of 2.2 years.

PIMCO’s “smart passive” approach incorporates credit analysis, which aims to remove undesirably risky paper from the portfolio, as well as real-time views on market liquidity.  Although HYS is not an actively-managed ETF, the approach allows for some management discretion.  Vineer Bhansali and Andrew Jessup will manage the fund.  Q & A with managers (pdf).

PIMCOs sampling technique reduces 787 index constituents to just 82 current holdings for the fund.  If HYS successfully matches the index, then HYS should also enjoy a relatively low duration of just 2.2 years and a yield around 6.9%, net of the 0.55% expense ratio.

HYS is PIMCO’s first high yield ETF.  It was preceded by PIMCO Investment Grade Corporate Bond Index Fund (CORP), which has a yield of 3.4% (less than half of HYS) and a duration of 6.4 years (almost 3 times HYS).

HYS appears to be at an attractive place on the high yield risk/reward curve.  From a risk standpoint, the closest competitor is Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (BSJF).  BSJF has a current yield of 4.7% and a duration of just 1.9 years, making it less sensitive than HYS to interest changes.

Another comparable ETF is AdvisorShares Peritus High Yield ETF (HYLD) with a current yield of 9.9% and duration of 3.6 years.  iShares iBoxx $ High Yield Corporate Bond (HYG) has the largest asset base among high yield ETFs, and has a current yield of 7.3% and an effective duration of about 4.4 years.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.