Pacific Global Asset Management has unveiled its newest ETF strategy with the introduction of the Pacific Global Senior Loan ETF (FLRT US).
The fund provides exposure to secured and unsecured senior loans issued in US dollars by non-investment-grade companies globally.
The actively managed ETF seeks to generate high current income and preserve capital by investing in a portfolio of senior floating-rate loans.
It has listed on NYSE Arca and comes with an expense ratio of 0.68%.
The fund was created by re-organizing the AdvisorShares’ Pacific Asset Enhanced Floating Rate ETF which Pacific Global adopted in 2019.
As such, it maintains its predecessor’s assets under management – approximately $30 million – and nearly four-year track record.
Senior loans are made by financial institutions to companies that are generally considered to have low credit quality. They have greater seniority in the issuer’s capital structure, taking priority over other unsecured or otherwise more junior debt.
The ETF invests in secured and unsecured senior loans issued in US dollars by non-investment-grade companies globally. By targeting floating-rate senior loans, the fund offers a hedge against rising interest rates.
It may invest up to 20% of its assets in other types of debt securities including corporate bonds and secured or unsecured second lien floating-rate loans.
The fund 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.
Pacific Global 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 its debt.
Anthony J. Dufault, Managing Director of Pacific Global ETFs, commented, “We believe that passive management is an inefficient strategy for floating-rate loan funds. Our experienced team of fixed income professionals seeks to add value by carefully selecting highly liquid, floating-rate loans of non-investment-grade companies.”
The largest passively managed senior loan ETF is the $6.0 billion Invesco Senior Loan ETF (BKLN US). This fund is linked to the S&P/LSTA US Leveraged Loan 100 Index which tracks the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads, and interest payments. The ETF comes with an expense ratio of 0.65%.