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Fixed Income Specialist PIMCO launched a new actively managed ETF that invests primarily in floating rate senior loans.
The PIMCO Senior Loan Active ETF (LONZ USA) was listed on NYSE Arca with an expenditure rate of 0.52%.
The fund entered the market with $65 million in assets.
Senior loans are granted by financial institutions to companies 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 variable rate coupons that adjust to reflect changes in interest rates. Compared to traditional bonds that pay fixed coupons, this feature makes floating rate securities much less likely to lose value when interest rates rise. As of 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 yield-hungry investors who are concerned about duration risk and wish to be less exposed to downside risk compared to high-yield bonds – according to Moody’s, in the event of issuer default, the recovery rate for senior loans is around 60% compared to 40% for high-yield bonds.
Senior Loans have also historically exhibited a lower correlation to major fixed income sectors, such as investment grade bonds and sovereign debt, and a higher correlation to inflation, making them a powerful diversifier for investors. traditional bond portfolios.
The ETF’s day-to-day operations will be led 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 leverage PIMCO’s network of more than 80 loan analysts to prudently manage credit risk while aiming to maximize current income.
Although the ETF consists primarily of floating rate senior loans, it may also, to a lesser extent, invest in secured loan obligations, high yield corporate bonds and preferred stocks. 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 potentially achieve superior risk-adjusted returns over time in what is arguably a less price-efficient asset class. While index-based approaches primarily consider the market value of outstanding debt issuance in their selection methodology, an active approach provides the latitude to avoid individual companies that have perceived a reduced ability to repay their debts.
David Forgash commented: “We are in a late cycle environment where credit markets are more difficult, volatility is increasing and central bank policy is becoming more restrictive. LONZ, like many of our ETF offerings, takes an active management approach that aims to be patient and cautious to take advantage of opportunities in credit markets in the weeks and months ahead.