BSCO ETF: Time to Crystalize Your Gains (Downgrade) (NASDAQ:BSCO)
thesis
Invesco Bullet Shares 2024 Corporate Bond ETF (Nasdaq: BIsco) is a fixed income exchange-traded fund we covered prior to last year here. In our original article, we highlighted how the name was a term fund The maturity guarantees are identical, and thus represent a good risk/reward from a drawdown perspective for yield-seeking investors. The fund has delivered since we expressed our opinion about continuing to carry the name:
The original argument was around a flat and skewed total return for the name given its analytics. These criteria have been met.
In light of the fund maturing later this year and a very tight credit spread environment, we’ll reconsider the name and analytics and express why it’s better to sell now and invest in true risk-free funds for the rest. year as a cash alternative.
Term funds provide lower risk
Properly structured term funds provide better risk/reward metrics through shallow drawdowns. This is because the duration of the fund is constantly decreasing, and its holders have a well-defined view on how the collateral will perform in the future. BSCO falls into this category and, when compared to long-term investment grade fixed income instruments, achieves the following:
When compared to the very popular iShares iBoxx Investment Grade Corporate Bond ETF (LQD), the fund has a very shallow drawdown profile, and has delivered a positive total return in the past three years despite the aggressive rise in interest rates.
The beauty of maturity-matched term funds is that the retail investor is actually buying into “diversified bonds.” The holdings vary, but they all have very similar maturity dates, so you get a rolling effect as the duration decreases each year. The closer you are to maturity, the lower the sensitivity to interest rates, and you are guaranteed a return on the original portfolio to maturity if there are no defaults in the underlying portfolio.
BSCO has delivered on these promises, even during a very adverse time period from an interest rate perspective. Please note that the fund is scheduled to mature later this year:
box It will expire on or about December 15, 2024 without Requires additional approval from the Board of Trustees (“Board”). The Trust or the Self-Traded Exchange Traded Trust (“the Trust”) or the Fund Shareholders, although the Board of Directors may change the termination date. in In connection with the Fund’s termination, the Fund will generate cash Distribute its net assets to current shareholders after doing so Appropriate allocations for any obligations on the Fund.
Source: Prospectus
While the fund is performing, let’s take a look at its current analysis and see if an investor would be better off selling here and investing in a similar product.
The 30-day yield is now lower than Treasury bonds
If we look at the fund’s current 30-day yield on securities, we will notice that it is lower than on Treasuries:
The reason this happens is twofold: on the one hand, it is a term fund with a very close maturity and no reinvestment, and second, the spreads have narrowed significantly. Essentially, the underlying bonds have already declined to the desired level, so the fund will not be able to achieve more than a cash flow return in the future. Because the vehicle was structured in a low interest rate environment, the portfolio’s return is now lower than what the risk-free assets currently offer.
The fund contains only investment grade bonds, so the credit risk is very low, but no less risky. At any point in time should an investor prefer Treasury bonds over corporate bonds if they both yield the same return. In our case, BSCOs are now riskier than Treasuries and their yields are lower. There is no reason to hold BSCO here because there is no upside, as the fund has already generated the vast majority of capital gains from its portfolio. There is only downside through unexpected default if a major risk off event occurs.
However, unless there is a portfolio default, any small loss in the fund price will eventually be recovered as the maturity date approaches. Why take this risk with a negative Treasury spread with no upside at all? People buy stocks or long-term fixed income because there can be significant capital gains. There is nothing available for BSCO from here until its due date. Just cut the dividend yield.
Where should you put your money if you sell?
BSCO was originally an investment-grade corporate bond fund with a fixed maturity date and thus a fixed duration profile. If investors are looking to reallocate cash to IG term bonds, there are several alternatives, such as LQD or the PIMCO Investment Grade Corporate Bond ETF (CORP) covered here.
As explained in the CORP article, we see that although price duration is attractive here (i.e. prices are at historical highs), corporate spreads are very tight. The corporate bond market is pricing in a smooth decline, with no room for error. IG bond spreads could easily double from current levels in a risk-off environment, hence our view of CORP “holding” rather than buying.
We would be more inclined to short BSCO here and put that money into treasury funds like the WisdomTree Floating Rate Treasury ETF (USFR) covered here. USFR yields 5.32% and has no credit risk nor any duration risk.
Conclusion
BSCO is a fixed income fund. The instrument contains investment-grade corporate bonds, which have a maturity of December 2024. The fund has a maturity-matched portfolio, meaning the underlying credits are also scheduled to mature by the end of the year. While this structuring option reduces risk, it also limits any upside since the bonds are effectively trading at face value currently. The name holder can only expect a cut in the dividend yield for the rest of the year, which is now a yield lower than what Treasuries offer. With no upside, a lower yield than Treasuries and the external risk of default in the portfolio name, it would be better to sell BSCO here and buy USFR.