Why Bank Loan ETFs are Booming

April 24th at 11:30am by John Spence

Investors have pumped nearly $2 billion into the largest ETF for bank loans so far this year as they hunt for high-yield options that provide some shelter from higher interest rates.

PowerShares Senior Loan Portfolio (NYSEArca: BKLN) has surged to $3.4 billion in assets and is currently paying a distribution yield of 4.6%. For comparison, U.S. 10-year Treasury notes are yielding only 1.7%.

BKLN competes with the index-based Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN), as well as the newer SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), which is actively managed. State Street (NYSE: STT) developed the active ETF along with GSO Capital Partners LP, the global credit business of private equity giant Blackstone Group (NYSE: BX). [Senior Loan ETFs Face New Actively Managed Rival]

Trading volume in the bank loan ETFs has been rising of late and BKLN saw “heavy inflows” on Tuesday, according to Chris Hempstead, director of ETF execution services at WallachBeth Capital LLC.

The senior loan ETFs “are all very liquid and each is unique in its own right,” he added.

BKLN, the biggest ETF in the category, has seen its assets more than double since the start of the year, Bloomberg News reports.

Jim Ross, head of State Street’s ETF business, told Bloomberg he expects more funds to list as interest in bank debt grows.

Bank loan ETFs make sense for income investors who think interest rates will eventually start rising, since the funds track floating-rate bonds.

“Most investors’ portfolios are dominated by fixed-rate bonds. The biggest risk that fixed-rate securities face (aside from default) is the potential for rising interest rates. An easy way to minimize this risk is to diversify a bond portfolio by adding exposure to floating-rate securities,” says Morningstar analyst Timothy Strauts in a profile of BKLN.

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

PowerShares Senior Loan Portfolio

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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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