Investors seeking a mix of income and a shield against higher interest rates have discovered bank loan ETFs. The category has matured to a degree that they can choose from both actively managed funds and passive, index-linked ETFs.
“There are a number of mutual funds, closed-end funds, and exchange-traded funds that invest in bank loans. There are pros and cons to investing in each fund format that are important to be aware of,” says Morningstar ETF analyst Timothy Strauts. “Exchange-traded funds are a relatively new vehicle for gaining exposure to bank loans.”
PowerShares Senior Loan Portfolio (NYSEArca: BKLN) is the oldest ETF in the group, launching in March 2011. The fund holds $4.8 billion of assets and is currently paying an SEC yield of 4.17%. BKLN is one of the best-selling ETFs this year. It has an expense ratio of 0.66%.
“ETFs have the advantage of offering below-average fees and intraday liquidity and tend to trade near net asset value. ETF investors have the choice between passive or active strategies in the ETF wrapper,” Strauts wrote in an article posted on Morningstar’s website Friday. “And for investors who value intraday liquidity, the current crop of bank-loan ETFs has greater trading volumes, on average, than its [closed-end fund] peer group.”