Higher Yield Bank-Loan ETF to Face Competition
October 31st, 2012 at 9:44am by Tom Lydon
With interest in the high-yield debt space rising, Pyxis Capital LP is planning a new bank loan exchange traded fund to help investors expand their portfolio’s current income.
The proposed Pyxis iBoxx Senior Loan ETF (SNLN) will try to reflect the performance of the Markit iBoxx USD Leveraged Loan Index, which holds the 100 most liquid bank loans, reports Jason Kephart for Investment News. SNLN will come with a 0.55% expense ratio.
The new fund would be in direct competition with the PowerShares Senior Loan ETF (NYSEArca: BKLN), which has a 4.4% 30-day SEC yield. BKLN has a 0.76% expense ratio.
Senior floating-rate bank loans are variable-rate, senior secured debt instruments issued by non-investment-grade companies. Since they hold debt with variable rates, senior loan ETFs come with diminished interest-rate risk. Nevertheless, regulators previously issued a warning on loans in July.
“Funds that invest in floating-rate loans may be marketed as products that are less vulnerable to interest rate fluctuations and offer inflation protection, when in fact the underlying loans held in the fund are subject to significant credit, valuation and liquidity risk,” the Financial Industry Regulatory Authority Inc. said.
Many have also associated bank loan securities with “junk” bonds. However, bank loans are relatively safer, as they are usually secured by collateral like equipment, real estate or accounts receivables. [Bank Loan ETF Pays 5% Yield]
“Bank loans are considered safer than traditional high-yield bonds because the secured collateral protects the investor in a default,” according to Morningstar analyst Timothy Strauts.
For more information on fixed-income funds, visit our bond ETFs category.
Max Chen contributed to this article.
Story updated to correct name and expense ratio of planned bank loan ETF.
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