Senior Loan ETF

Investors are taking a harder look at senior bank loan ETFs as a way to access higher yields while hedging exposure to rising rates.

Senior bank loans are private debt instruments issued by a bank and provide capital to companies that typically fall below investment-grade credit ratings. However, the riskier “junk” bonds also come with higher yields. Additionally, as a floating rate instrument, senior bank loans can keep up with changes in interest-rates and are more stable compared to bonds over the long-run. [Senior Bank Loans]

According to Capital IQ, U.S. these leveraged loans come with an average 5.4% yield, Financial Times reports.

An ETF that tracks senior loans, PowerShares Senior Loan Portfolio (NYSEArca: BKLN), has a 3.97% 30-day SEC yield. Investors can also take a look at the Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN). BKLN is up 2.7% over the past three months while SNLN gained 2.9%. [Senior Bank Loan ETFs Yielding 5%]

BKLN has netted inflows of more than $900 million year to date, according to IndexUniverse data. The ETF now holds assets of $2.4 billion, so 2013 inflows have been significant.

Over $8 billion has flowed into U.S. senior loan funds so far this year as investors looked for a cheap way to access this segment of the market. For instance, BKLN has a 0.76% expense ratio and SNLN comes with a 0.55% expense ratio, compared to the 1.2% in mutual funds tracked by Morningstar. [High-Yield Investors Moving Into Bank Loan ETFs]

In ETFs, most of the new inflows went into the BKLN as investors sought attractive yields with a way to protect themselves from rising interest in the future. While the ETF offers high yields, it is exposed to speculative grade debt, with 44% in BB-rated bonds, 41% B and 9% CCC.