ETFs indexed to senior loans have been gaining traction with investors looking for above-average yields and some protection from rising interest rates. Now State Street Global Advisors is trying to muscle in with a new actively managed ETF designed to beat the index on a risk-adjusted basis, rather than simply track it.
State Street developed the active ETF along with GSO Capital Partners LP, the global credit business of private equity giant Blackstone Group (NYSE: BX).
The new SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), which listed Thursday, will try to outperform the Markit iBoxx USD Liquid Leveraged Loan Index and the S&P/LSTA U.S. Leveraged Loan 100 Index.
SRLN has an expense ratio of 0.90%, a bit higher than the two existing passively managed ETFs that invest in senior loans.
Senior loans are private debt instruments issued by a bank and provide capital to companies that typically fall below investment-grade credit ratings. They pay higher yields to compensate investors for the extra risk. Additionally, as a floating rate instrument, senior bank loans provide some cushion from rising interest rates. [Bank Loan ETFs Offer 4% Yields, Protection from Rising Rates]
Investors have been buying senior loans after Federal Reserve chief Ben Bernanke hinted that the central bank could curb asset purchases if the economy continues to heal, reports Sridhar Natarajan for Bloomberg. [Bank Loan ETFs Hot on High Yields, Rising Rate Fears]
Active management
SRLN is the first actively managed ETF for senior loans.
“Given the high turnover of senior loans and the critical importance of credit selection, we believe an active strategy provides a key advantage to investors who want access to this corner of the market,” said James Ross, global head of SPDR ETFs at State Street.
GSO/Blackstone Debt Funds Management LLC is the ETF’s subadvisor. When picking securities for the fund, it will seek to construct a portfolio of loans it believes is less volatile than the general loan market, according to the prospectus.