PIMCO unveils actively managed senior loan ETF

Jun 14th, 2022 | By | Category: Fixed Income

Fixed income specialist PIMCO has launched a new actively managed ETF that invests primarily in senior floating-rate loans.

David Forgash, Head of Global Leveraged Loan Portfolio Management at PIMCO.

David Forgash, Head of Global Leveraged Loan Portfolio Management at PIMCO.

The PIMCO Senior Loan Active ETF (LONZ US) has been listed on NYSE Arca with an expense ratio of 0.52%.

The fund has come to market with $65 million in assets.

Senior loans are made by financial institutions to companies that are generally considered to have low credit quality. They have greater seniority in an issuer’s capital structure, taking priority over other unsecured or otherwise more junior debt, and are often directly backed by underlying collateral.

Most senior loans are structured with floating-rate coupons that adjust to reflect changes in interest rates. Compared to traditional bonds which pay fixed coupons, this feature makes floating-rate securities far less susceptible to losing value when interest rates increase. As of 10 June, the ETF’s effective duration was just 0.63 years.

Due to the inherent characteristics of senior loans, the ETF may appeal to yield-hungry investors who are concerned about duration risk and wish to have less exposure to downside risk compared to high-yield bonds – according to Moody’s, in the event of issuer default, the recovery rate of senior loans is approximately 60% compared to 40% for high-yield bonds.

Senior loans have also historically exhibited a lower correlation to core fixed income sectors, such as investment-grade bonds and sovereign debt, and a higher correlation to inflation, making them a powerful diversifier for traditional bond portfolios.

Day-to-day operations of the ETF will be headed up by David Forgash, Head of Global Leveraged Loan Portfolio Management at PIMCO, who will be supported by portfolio managers Giang Bui, Chris Kemp, and Tanuj Dora.

The portfolio management team will further harness PIMCO’s network of more than 80 loan-oriented analysts to prudently manage credit risk while aiming to maximize current income.

While the ETF will primarily consist of senior floating-rate loans, it may to a lesser extent also invest in collateralized 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 the US dollar.

PIMCO argues that the fund’s active management approach enables it to potentially obtain superior risk-adjusted returns over time in what is arguably a less efficiently priced asset class. While index-based approaches principally consider the market value of the debt issuance outstanding in their selection methodology, an active approach provides the latitude to avoid individual companies that have perceived reduced ability to repay their debts.

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 restrictive. LONZ, like many of our ETF offerings, embraces an active management approach that aims to be patient and prudent to take advantage of the opportunities in credit markets in the weeks and months ahead.”

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