BKLN now has $4.28 billion in assets under management. The ETF’s success along with today’s low interest rate environment have combined to be a perfect storm of sorts that has fostered increased competition in a previously empty and opaque corner of the ETF universe. [Bank Loan ETFs: More Competition In A Red Hot Sector]
For example, two new actively managed senior loan ETFs have debuted this year and both are off to fine starts, underscoring investors’ willingness to shift from traditional high-yield fare to bank loans. The SPDR Blackstone / GSO Senior Loan ETF (NYSEArca: SRLN) is not even two months old yet and already has more than $203 million in assets. The First Trust Senior Loan Fund (NasdaqGM: FTSL) launched earlier this month and already has nearly $25 million in assets.
As insulation against rising rates, FTSL looks particularly compelling with a weighted average effective duration of just 0.64 years, according to issuer data. The floating rate feature found in bank loan ETFs is another source of allure for investors.
“A key characteristic of senior loans is their floating rate feature, which resets generally every 30 – 90 days based on prevailing short-term interest rates. It is this resetting feature that has the potential to provide protection in a rising interest rate environment,” said Illinois-based First Trust.
Fortunately, the proof is in the pudding regarding the protection bank loan ETFs offer against rising rates. Assuming a 1% increase in interest rates, the S&P/LSTA U.S. Leveraged Loan 100 Index, the index tracked by BKLN, would still generate positive returns. However, indexes tracking everything from medium-term Treasurys to municipal bonds to dollar-denominated emerging markets sovereign debt would offer negative returns, according to First Trust data.
ETF Trends editorial team contributed to this story.
Full disclosure: Tom Lydon’s clients own HYG.