PGIM launches two new active fixed income ETFs

Jul 28th, 2023 | By | Category: Fixed Income

PGIM Investments has unveiled two new actively managed fixed income ETFs providing exposure to high-quality collateralized loan obligations (CLOs) and a short-duration portfolio diversified across multiple bond sectors.

Stuart Parker, President and CEO of PGIM Investments

Stuart Parker, President and CEO of PGIM Investments

Stuart Parker, President and CEO of PGIM Investments, commented: “Active ETFs are one of the fastest growing segments of the ETF market today. PGIM will continue to aggressively expand its suite of products to meet this client demand by either offering new ways to access the market or expanding access to our flagship strategies.”


CLOs are debt securities issued in different tranches by a trust or other special purpose vehicle and backed by an underlying portfolio consisting typically of below-investment-grade corporate loans.

The underlying loans, which are selected by a CLO’s manager, typically may include domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans.

Although the underlying loans are rated below investment grade, most CLO tranches are typically rated investment grade because they benefit from diversification, credit enhancements, and subordination of cash flows.

AAA-rated CLOs have a first priority on the interest and principal from the underlying pools of senior secured loans. By investing in this tranche, investors can gain access to a diverse pool of bonds which, collectively, may offer higher yields than other AAA-rated investments.

CLOs have historically been available only to institutional investors and were only packaged within the ETF wrapper for the first time in 2020. Despite some initial skepticism, investor interest in CLOs has been robust due to inherent benefits such as low volatility, low downgrade risk, and low correlations with traditional fixed income assets.

Despite growing to $1 trillion in size, the CLO market is relatively complicated, strengthening the argument for an active approach to the sector.

The PGIM AAA CLO ETF (PAAA US) is sub-advised by PGIM Fixed Income, one of the largest and most experienced securitized credit and leveraged finance managers with $101 billion in securitized credit assets under management, including $55 billion in CLO tranches.

While the ETF represents a new retail offering for the firm, PGIM Fixed Income has been managing sleeves of high-grade CLOs within their investment strategies for more than 15 years, with a team of 27 investment professionals dedicated to the securitized credit space.

PAAA seeks to maximize total return through a combination of current income and capital appreciation, investing primarily in US CLOs rated AAA or equivalent.

Edwin Wilches, co-Portfolio Manager of PAAA, said: “The CLO market has evolved since the Global Financial Crisis and represents an enormous, relatively untapped opportunity for retail investors. High-quality CLOs offer one of the best relative value trades in the fixed income market today given their attractive yield potential, floating rate coupons, and credit protection in AAA tranches.

“As we remain in a period of economic uncertainty with tighter financial conditions and corporate defaults expected to increase, high-quality CLOs have the potential to insulate an investor’s portfolio while providing diversification benefits with less idiosyncratic risk and the potential for attractive risk-adjusted returns.”

The fund has been listed on NYSE Arca with an expense ratio of 0.19%.

Short-duration multi-sector

PGIM’s second launch is the PGIM Short Duration Multi-Sector Bond ETF (PSDM US) which allocates across different sectors of the fixed income market while targeting an average portfolio duration of three years or less.

Eligible types of debt instruments include US government bonds, mortgage-related and asset-backed securities, corporate bonds, foreign debt securities, and loan participations and assignments.

Under normal market conditions, the ETF is expected to invest approximately 30% of its assets in non-investment grade securities although this may be increased to a maximum of 50% in a search for greater income.

In managing the ETF, PGIM Fixed Income utilizes a combination of top-down economic analysis and bottom-up research in conjunction with proprietary quantitative models and risk management systems. The firm may consider investment factors such as expected total return, yield, spread, and the potential for price appreciation, as well as credit quality, maturity, and overall risk.

The fund has been listed on Cboe BZX Exchange with an expense ratio of 0.40%.

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