Bank loan ETFs are sitting on gains for 2013 while diversified bond funds are in the red due to rising interest rates.

PowerShares Senior Loan Portfolio (NYSEArca: BKLN) is one of the best-selling ETFs this year with net inflows of about $3.3 billion, according to IndexUniverse. It is the largest bank loan ETF with assets of $4.8 billion.

BKLN and other bank loan ETFs have been popular with investors seeking yield and protection from rising rates. The funds have delivered on both fronts.

For example, BKLN is yielding more than 4%. In terms of performance, the bank loan ETF has delivered a year-to-date total return of 2.8%, compared with a loss of 2% for iShares Core Total US Bond Market ETF (NYSEArca: AGG), according to Morningstar data.

Bank loans “have tended to have low average default rates versus high-yield bonds, above-average yields, and very low duration (given that they pay floating rates), are negatively correlated to Treasury bonds, and have historically generated above-average returns in rising interest-rate environments,” writes Morningstar ETF analyst Timothy Strauts in a commentary posted Wednesday.

Other ETFs in the category include Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN), irst Trust Senior Loan Fund (NasdaqGM: FTSL) and SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN). [Bank Loan ETFs: Active or Passive?]

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