Bank loan exchange traded funds are relatively new products that are trading in the market. These types of funds have taken a back seat for the past year, but as investors search to squeeze income out of the market, bank loan ETFs are back in focus.
“Most investors typically become interested in bank loans when interest rates are expected to rise. With the Federal Reserve committed to maintaining low rates for the next several years, current investor apathy to bank loans shouldn’t come as a surprise. But with yields in the high-yield bond sector near historic lows, bank-loan funds are looking more and more attractive on a relative basis,” Timothy Strauts wrote for Morningstar. [BlackStone Teams with State Street for Senior Loan ETF]
Bank loan ETFs attracted about $1.3 billion in new assets last year, as investors flooded into high yield and emerging market funds. Senior floating-rate bank loans are variable-rate, senior secured debt instruments issued by non-investment-grade companies, reports Strauts. Bank loans are secure and safe, they are usually secured by collateral like equipment, real estate or accounts receivables. They are considered safer than high yield bonds because an investor is protected in the event of default. [ETF Spotlight: BKLN]
But don’t be surprised – bank loan bonds are still considered junk. The silver lining is that when interest rates do begin to rise, investors in bank loans are in a better position than a bond investor since the interest rate is floating. Although rates are not on schedule to rise anytime soon, when they do so, bank loan investors won’t have to sell, reports Carla Fried for Y-Charts on Forbes.
The PowerShares Senior Loan ETF (NYSEArca: BKLN) has a 4.8% yield, similar to that of many high yield junk bond ETFs. BKLN is up 2% over the past month as yield seeking investors have uncovered this income producing area of the market. As of early July, BKLN had $583 million in assets under management, but has since collected $1 billion as of October 8. This is a 14% jump, according to PowerShares data.
Furthermore, trading desks are rumored to be using bank loan ETFs instead of credit default swaps since underlying paper is traded on a regular basis, reports Benzinga on Nasdaq. [ETF Chart of the Day: BKLN]
PowerShares Senior Loan ETF
Tisha Guerrero contributed to this article.