Many have taken up speculative grade debt to augment their portfolio’s yield potential. Alternatively, investors can take a look at senior loan exchange traded funds that provide above-average yields while mitigating the effects of higher interest rates.
Senior floating-rate bank loans are a type of variable-rate, senior secured debt instruments issued by below-investment-grade companies. The bank loans have a variable rate that adjusts every 30-90 days and are set at a specific level above LIBOR – the duration of a bank-loan fund is near zero. [Senior Loan ETFs: ‘Steady Returns and Higher Yields’]
Moreover, bank loans are secured by collateral such as equipment, real estate, or accounts receivable, which helps shield investor in the event of a default, according to Zacks. [2013 Could be the Year of the Bank Loan ETF]
Senior loans also help diversify an investment portfolio as the asset shows a lower correlation with most other asset classes. [High-Yielding ETFs Make Bank Loan Market More Volatile: Report]
ETF investors have four options to gain exposure to senior bank loans.
PowerShares Senior Loan Portfolio (NYSEArca: BKLN) tracks the S&P/LSTA U.S. Leveraged Loan 100 Index, which holds the largest institutional leveraged loans. BKLN has a 0.66% expense ratio and a 4.02% 30-day SEC yield. The fund’s floating rate component resets on an average 32.3 days.
Top holdings include Forescue Metals 2.0%, First Data Corp. 1.9%, Asurion Corp 1.9%, H.J. Heinz Comp 1.9% and Intelsat Jackson Holdings 4.6%. The ETF has 11.1% in high-yield securities and 88.9% in loans.
Credit quality includes BBB 4%, BB 43%, B 45% and CCC 6%. BBB is considered low investment grade quality, and anything BB and below is speculative grade quality.
Highland/iBoxx Senior Loan (NYSEArca: SNLN) tries to reflect the performance of the Markit iBoxx Liquid Leveraged Loan Index. SNLN has a 0.55% expense ratio and a 5.09% 30-day SEC yield. The fund’s floating rate component resets on an average 32 days.