PIMCO Senior Loan Active Exchange-Traded Fund

LONZ

Market cap $575M

The PIMCO Senior Loan Active Exchange-Traded Fund ETF is an active senior loan ETF managed by PIMCO. The fund provides diversified exposure to these high-yield investments, with an 8.6% dividend yield, and a 7.3% yield to maturity. It has outperformed most other senior loan ETFs since inception, with spottier performance relative to higher-yield CLO ETFs.

Invesco Senior Loan ETF (BKLN) is rated BUY as a core income portfolio holding due to its conservative ratings profile and minimal distressed exposure. BKLN offers liquidity, transparency, and low expense, tracking the 100 largest leveraged loans with a current ~7% yield and only 0.02% in distressed assets. Bank loans provide senior secured, floating-rate income with lower volatility than BDCs, but sector risks—especially software—remain material.

Downgrade LONZ to 'Sell' as the current 6.11% yield is insufficient for single-B risk in today's macro environment. Fund's low historical drawdown (-4%) may not hold in a recession; expect up to -10% downside in economic contraction. High expense ratio and floating rate sensitivity mean yields will drop further when the Fed cuts rates, worsening risk/reward.

We are downgrading the PIMCO Senior Loan Active Exchange-Traded Fund to 'Hold' due to ongoing monetary easing and decreasing yields. The Fed's rate cuts have significantly lowered the yield curve, impacting LONZ's dividend yield, which is set to decline further. The Fund's overweight position in single-B credits, combined with historically low credit spreads, presents heightened risk in a potential recessionary scenario.

The PIMCO Senior Loan Active ETF offers prudent exposure with low price risk and high-income attributes. LONZ's near-zero effective duration and diversified corporate bank loans portfolio mitigate interest rate sensitivity, which I deem beneficial in today's uncertain economic environment. Despite investing in non-investment-grade loans, LONZ's position in the debt waterfall structure, compelling forward dividend yield, and potential for enhanced net income translate into play into a favorable trajectory.

The LONZ ETF is an actively managed portfolio of leveraged loans. Adjusted for leverage, LONZ's performance appears identical to a passive leveraged loan ETF. With a looming economic slowdown, investors may want to consider higher credit-quality investments like the JAAA ETF.

The Federal Reserve continues to hold fast to its highly data-driven, wait-and-see approach on rate policy. Last week's FOMC meeting further bolstered the market's belief in a lone rate-cut scenario, and senior loan ETFs have gained traction as elevated rate expectations spill over into the second half of the year.

LONZ: Under The Radar Fund From PIMCO, 7% Yield

A changing interest rate narrative prompted many advisors and investors to reevaluate their bond exposures this month. Asset managers stepped in to offer their perspectives on the changing market dynamics and where the risks and opportunities lie in the 2024 Fixed Income Symposium hosted by VettaFi.

Fixed income ETFs gathered $51 billion of new money in the first quarter. This represented 26% of the industry's net inflows.