PIMCO Presents Actively Managed Senior Loan ETF | ETF strategy
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Fixed income specialist PIMCO has launched a new actively managed ETF investing primarily in senior floating rate loans.
That PIMCO Senior Loan Active ETF (LONZ USA) was listed on NYSE Arca with an expense ratio of 0.52%.
The fund entered the market with assets of $65 million.
Senior loans are made by financial institutions to companies that are generally considered to have poor credit. They have a higher seniority in an issuer’s capital structure, are senior to other unsecured or otherwise more subordinated debt obligations, and are often directly backed by underlying collateral.
Most senior loans are structured with floating rate coupons that adjust to changes in interest rates. Compared to traditional fixed-coupon bonds, this characteristic makes floating-rate securities far less vulnerable to falling in value when interest rates rise. On June 10, the ETF’s effective duration was only 0.63 years.
Due to the inherent characteristics of senior loans, the ETF may appeal to income-seeking investors who are concerned about duration risk and want less downside risk compared to high yield bonds – according to Moody’s, in the event of issuer default, senior loan repayment rates are around 60% compared to 40% for high yield bonds.
Senior loans have also historically shown lower correlation to major fixed income sectors such as investment grade and government bonds, and higher correlation to inflation, making them a strong diversifier for traditional bond portfolios.
Day-to-day operations of the ETF are managed by David Forgash, Head of Global Leveraged Loan Portfolio Management at PIMCO, who is assisted by portfolio managers Giang Bui, Chris Kemp and Tanuj Dora.
The portfolio management team will also leverage PIMCO’s network of more than 80 credit-focused analysts to prudently manage credit risk while seeking to maximize current returns.
While the ETF will consist primarily of senior floating rate loans, it may also invest to a lesser extent in secured loan obligations, high yield corporate bonds and preferred stock. Up to 20% of portfolio assets may be invested in securities denominated in currencies other than US Dollars.
PIMCO argues that the fund’s active management approach allows it to deliver potentially superior risk-adjusted returns over time in an arguably less efficiently priced asset class. While index-based approaches primarily consider the market value of the outstanding debt obligations in their selection methodology, an active approach offers the leeway to avoid individual companies that have perceived a reduced ability to repay their debt.
David Forgash commented: “We are in a late cycle environment where credit markets are more challenging, volatility is increasing and central bank policy is becoming more hawkish. LONZ, like many of our ETF offerings, takes an active management approach that aims to be patient and prudent to take advantage of opportunities in the credit markets over the coming weeks and months.”