First Trust on Thursday listed a new exchange traded fund for senior bank loans that will compete against three existing ETFs in the hot sector.
First Trust Senior Loan Fund (NasdaqGM: FTSL) will be actively managed.
PowerShares Senior Loan Portfolio (NYSEArca: BKLN) is by far the largest ETF in the category with assets of $3.8 billion. It is also the oldest in the group, launching in March 2011. BKLN charges an expense ratio of 0.66% and is paying a 12-month yield of 4.73%.
Bank loan ETFs have been extremely popular with investors searching for yield but with some protection against rising interest rates. Some investors also view the sector as alternative to high-yield corporate bond ETFs that could be overvalued after such a strong rally. [Why Bank Loan ETFs are Booming]
For example, BKLN is one of the best-selling ETFs in 2013 with net inflows of $2.3 billion, according to IndexUniverse data. On Wednesday, the ETF reported its biggest trade of the year with 2 million shares changing hands in the afternoon, Bloomberg reports.
FTSL, the First Trust fund, will square off directly against SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), which is also actively managed. SRLN has a 0.90% expense ratio. FTSL has an expense ratio of 0.85%.
Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN) rounds out the group. Like BKLN, it takes an indexed approach. SNLN levies an expense ratio of 0.55%.
Next page: Breaking down the new First Trust Senior Loan Fund
First Trust says its newest offering is geared to capitalize on the relatively attractive yield within the senior loan market while seeking to mitigate interest rate risk.
“With interest rates at historically low levels, these are challenging times to invest for income. At the same time, many believe there is nowhere for interest rates to go, but up,” the asset manager said in a presentation on FTSL. “In this environment, many investors are seeking alternative sources of income, including those which have historically reacted favorably during periods of rising interest rates such as senior loans.”
Bank loans have a floating-rate feature which typically resets every one to three months based on short-term interest rates.
“It is this resetting feature that has the potential to provide protection in a rising interest rate environment. Additionally, senior loans may offer relatively attractive yields compared to traditional fixed-rate bonds and often with less volatility,” First Trust notes. “While senior loans are generally loans which have been made to below-investment grade companies, they are backed by collateral, such as property, and are senior in the capital structure of a company.”
FTSL also offers a potential diversification benefit because of the historically low correlation of senior loans to other asset classes, the firm added.