Nevertheless, speculative-grade bonds still have low default rates. S&P projects default rates were 2.6% in June 2013 and could rise to 3.1% in June 2014. In August, the default rate for leveraged loans was 2.2%. The long-term average has been 4.5%.
Observers, though, warn that a flight to quality could cause a sell-off in bank loans, but there has not been a big enough move in investment-grade debt to instigate an exodus from high-yield yet.
Many investors and advisors sought out bank loans as a way to mitigate the effects of rising interest rates while generating attractive yields. [Bank Loan ETFs Still in the Groove as Interest Rates Rise]
“Advisors really like loan funds for their floating rate nature—it greatly reduces their interest rate risk so investors aren’t burned in a rising rate environment. Still a credit risk, but with low rates elsewhere, they’re stuck with this for income,” Jeff Tjornehoj, head of Lipper Americas research, said in the article. [Bank Loan ETFs for Yield and Rising Rate Hedge]
Investors interested in senior floating rate bank loan ETFs can take a look at PowerShares Senior Loan Portfolio (NYSEArca: BKLN), Highland/iBoxx Senior Loan (NYSEArca: SNLN), SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) or First Trust Senior Loan Fund (NasdaqGM: FTSL).
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.