Investors in the new senior loan ETF will essentially be betting that the GSO/Blackstone managers have the expertise and skill to outperform the index when volatility is factored in. State Street says the strategy is “designed to generate higher risk adjusted returns while seeking to maintain capital preservation.”
A three-horse race in senior loan ETFs
The new actively managed ETF will be going head-to-head against two passive senior bank loan ETFs: PowerShares Senior Loan Portfolio (NYSEArca: BKLN), which tracks the S&P/LSTA U.S. Leveraged Loan 100 Index; and the Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN), which tracks the Markit iBoxx Liquid Leveraged Loan Index.
SNLN has a 0.55% expense ratio and a yield to maturity of 5.45%. It holds assets of $60.5 million and was launched in November 2012.
BKLN has a 0.66% expense ratio and a yield to maturity of 5.69%. The ETF is much larger with over $3 billion in assets under management. It is also one of the most popular ETFs so far this year with net inflows of $1.6 billion, according to IndexUniverse data.
The ETF’s solid inflows may reflect some investors rotating away from high-yield corporate bonds and into senior loans on rising rate fears. New-issue leveraged loan volume climbed to a post-credit-crunch high of $185.2 billion in the first quarter, according to S&P Capital IQ.
BKLN is an appropriate holding for investors who are comfortable assuming greater credit risk and who may be looking for floating-rate bonds to protect against rising interest rates, says Morningstar analyst Timothy Strauts.
“Bank loans are denoted ‘high yield’ in large part because the firms issuing them are highly leveraged,” he writes in a report on the ETF. “Most investors typically become interested in bank loans when interest rates are expected to rise.”
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Max Chen contributed to this article.