Senior Bank Loan ETFs Yielding 5%

December 11th at 2:31pm by John Spence

The largest ETF tracking senior bank loans is breaking out as investors look beyond high-yield bonds for their income needs.

In fact, PowerShares Senior Loan Portfolio (NYSEArca: BKLN) was up for the ninth straight session on Tuesday.

“These loans from banks to relatively high-risk issuers have the potential to deliver some attractive returns,” writes Michael Johnston at ETF Database.

“Senior loans aren’t often a core holding in many portfolios, but they can be a very useful addition for those in search of attractive yields. BKLN is a bit expensive, but can offer a way to generate attractive distributions with minimal interest rate risk,” he adds.

BKLN has a yield of nearly 5% and charges an expense ratio of 0.76%.

Morningstar analyst Timothy Strauts describes the senior loan ETF as a satellite holding for investors who are comfortable with higher credit risk and looking for floating-rate bonds to protect against rising interest rates.

“Most investors typically become interested in bank loans when interest rates are expected to rise,” Strauts noted. “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.”

BKLN has posted a total return of 9.6% this year.

The ETF recently got some competition from Pyxis iBoxx Senior Loan (NYSEArca: SNLN). [Senior Bank Loan ETF Offers High-Yield Alternative]

BKLN holds $1.4 billion in assets. The fund has raked in net inflows of about $1.2 billion this year, according to IndexUniverse. It has quickly grown to become the third-largest speculative-grade debt ETF.

Bank loan ETFs are attracting flows amid concerns that junk bonds are losing momentum after more than doubling since 2008, Bloomberg reported recently. The spread between yields on bonds and loans has fallen to less than half the historic average amid the Fed’s bond-buying programs.

“Loans are a compelling asset class compared to high yield at these levels,” said Jason Rosiak, the head of portfolio management at Pacific Asset Management, in the Bloomberg story. [High-Yield Investors Moving Into Bank Loan ETFs]

In high-yield bonds, danger signs are flashing after a strong run, The Wall Street Journal reports, citing relatively low yields, a still-shaky economy, the U.S. fiscal cliff and Europe’s debt crisis.

“The price appreciation investors have enjoyed over the past few years might be over,” the WSJ reports. “As an alternative, some strategists recommend leveraged-loan funds.”

PowerShares Senior Loan Portfolio

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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