BINC – General presentation and investment thesis
A reader asked my opinion on the BlackRock Flexible Income ETF (NYSEARCA:BINC), an actively managed diversified bond ETF. This is a relatively young fund, established in mid-2023 and focused on on investment grade securities and with a forward yield of 5.3%. BINC's investment thesis is based on:
- Diversified bond holdingswith investments in over 1,000 securities of most relevant bond sub-asset classes, including some niche classes
- A solid track recordthe fund outperforming most of its peers since its creation
The above makes for a solid fund and investment opportunity, although nothing to write home about. Let's take a closer look at each of these points.
Diversified bond holdings
BINC is a diversified bond ETF, with investments in over 1,000 securities across most relevant bond sub-asset classes. The fund's holdings include U.S. and international corporate bonds, investment grade and high yield, as well as mortgage-backed securities, CLOs, other securitized products and foreign government bonds. Some of these sub-asset classes are rare and excluded from most large bond ETFs, including CLOs. The fund does not Currently invest in Treasury bills, but it is authorized to do so, in accordance with its prospectus. BINC also uses swaps, futures and other derivatives, primarily for hedging purposes.
The current weightings of the sub-asset classes are as follows.
BINC is an actively managed fund, so investments and weightings are chosen to (attempt to) increase income and returns while reducing risk. As an example, BINC managers have chosen to exclude Treasuries from the fund in the past, with a potentially significant impact on the fund's performance. This move appears to have been effective, with Treasuries having underperformed most other bond sub-asset classes since the fund's inception.
More broadly, as the fund is actively managed, performance depends to a certain extent on the fund management team and its investment decisions. The potential returns and dividends are higher than those of an index fund, as are the risks.
BINC currently focuses on investment grade bonds, with these making up approximately 65% of its portfolio and with a median credit rating of BBB. Credit quality is somewhat high, but lower than most large investment-grade bond ETFs, including the benchmark Vanguard Total Bond Market Index Fund ETF (BND).
Considering the above, BINC is expected to suffer losses during downturns and recessions, unlike BND and similar funds. BINC has not yet experienced a slowdown, so I can't really assess its performance during such a slowdown.
Annualizing the fund's dividend payments since its inception in mid-2023 gives me a dividend yield of 5.3%. This yield seems a bit higher than expected for a fund with BINC's credit risk, but that is almost certainly because the fund didn't exist in early 2023, when bond fund dividends were lower.
Overall, BINC's dividend yield is something of an advantage for investors, but not a significant advantage over its peers. Once the fund is a little older, dividend yields should be closer to those of BND and others.
BINC currently focuses on fixed rate bonds, with these representing 87-92% of its portfolio. The fund's CLOs are floating rate, and perhaps some of its asset-backed securities are as well.
BINC's duration is below average, comparable to high yield bonds.
The reasons for the above vary, including the fund's floating-rate holdings and high-yield bond holdings. I imagine this is at least partly an active investment decision made by the fund, given the recent volatility in interest rates.
For this reason, BINC should outperform when interest rates rise, as has been the case since the fund's inception. Other investment decisions may also have played a role, including choosing not to invest in Treasuries and the fund's high-yield corporate bond investments, which performed even better than those of BINC itself.
Finally, the fund focuses on US bonds, which represent around 68% of its portfolio. BINC invests in foreign currency bonds, but the currency risk appears hedged, at least for now.
Overall, BINC provides investors with diversified exposure to most bond sub-asset classes, a clear advantage for investors.
Strong performance history
BINC is an actively managed fund, and from what I've seen, its active strategy is one of its most important differentiators. Investors can gain similar exposures to BINC by investing in a few other ETFs, including BND and the iShares iBoxx $High Yield Corporate Bond ETF (NYSEARCA: HYG). What (potentially) sets BINC apart from most other bond ETFs is its active investment strategy which could, potentially, lead to outperformance.
BINC itself has, in fact, outperformed most bonds and bond sub-asset classes since its inception and during most relevant periods. High yield corporate bonds performed even better, although not significantly.
Importantly, the fund outperformed with a 2/3 allocation to investment grade bonds and a 1/3 allocation to high yield bonds, consistent with current portfolio weightings. This means that the outperformance was not exclusively, or even mainly, due to higher credit risk taking.
From what I've seen, BINC's outperformance was due to several factors. Investments in high-yield bonds played a role, but not decisive. Excluding Treasuries certainly helped, as did its lower duration portfolio. Some of its investments in more specialized sub-asset classes have been useful, notably CLOs.
In my opinion, BINC's outperformance is a sign of a successful and effective active investment strategy. Remember that the fund is more or less selected doing these things, leading to outperformance in the past. To the extent that the fund's managers continue to run the fund successfully, BINC should also continue to outperform.
More generally, I tend to lean towards actively managed fixed income funds, as I believe this is a space ripe for active strategies. Savvy fixed-income investors can outperform the index quite reliably by focusing on bonds offering relatively high returns for their credit risk, or by buying when prices are (abnormally) low. Bonds are somewhat illiquid, certainly more so than stocks, which means more buying opportunities.
Importantly, the data bears this out, with active bond funds having a much better track record than stock funds. Most active bond funds have outperformed their benchmark over the past five years, and a slight majority of the cheapest funds have over the past decade. Choosing the right funds at the right time would help increase these numbers, although this is easier said than done (but not impossible to do).
On a more negative note, BINC has underperformed compared to some of my favorite bond ETFs, including those focused on CLO debt tranches and fallen angels (recently downgraded investment grade bonds to high yield).
While the above does not diminish BINC's past performance or success, it does make the fund a slightly less attractive investment. Less reason to invest in BINC if the ETFs above are extremely strong. I'm not convinced that this is necessarily the case, as BINC's performance history is quite short and it differs significantly from the funds above in important respects, notably in terms of diversification and credit risk. Nonetheless, it is an important question to consider.
BINC's diversified bond holdings and strong performance track record make this fund a buy.