Senior Loan ETFs: ‘Steady Returns and Higher Yields’

August 16th at 2:25pm by John Spence

SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) has grown to nearly $500 million since listing less than five months ago, illustrating the soaring popularity of bank loan ETFs.

The current market environment seems to be right in bank loan ETFs’ wheelhouse as investors clamor for income while also guarding against the negative impact of rising rates.

“Steady returns and higher yields with secured claims to a business’s assets is the attraction for investor’s to this asset class,” S&P Dow Jones Indices said in a note Friday. [2013 Could be the Year of the Bank Loan ETF]

Other ETFs tracking the sector include PowerShares Senior Loan Portfolio (NYSEArca: BKLN), Highland/iBoxx Senior Loan (NYSEArca: SNLN) and First Trust Senior Loan Fund (NasdaqGM: FTSL).

SRLN and FTSL are actively managed funds, while BKLN and SNLN are passive, index-tracking ETFs.

BKLN, which is managed by Invesco PowerShares, is the oldest ETF in the group, listing in March 2011. It is also the largest with about $5.2 billion of assets. The fund has a 12-month yield of 4.66%.

BKLN and other bank loan ETFs invest in floating-rate securities, which provide protection when interest rates rise.

“Senior floating-rate bank loans are variable-rate, senior secured debt instruments issued by non-investment-grade companies. Bank loans have a variable rate that adjusts every 30-90 days. The duration of a bank-loan fund is near zero because of the regular adjustment of interest rates. This rate is a fixed-percentage spread over a floating base rate–typically Libor,” explains Morningstar analyst Timothy Strauts in a profile of BKLN.

“Bank loans are the most senior security in the capital structure. They are secured by collateral such as equipment, real estate, or accounts receivable,” he added. “Bank loans are considered safer than traditional high-yield bonds because this secured collateral protects the investor in the event of a default.”

BKLN is one of the top-selling ETFs this year with inflows of more than $3.7 billion, according to IndexUniverse data.

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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