Although the Federal Reserve appears to be taking a patient approach to boosting interest rates, it is never too early to start thinking about exchange traded fund options that can help mitigate the negative effects of rising rates.
Floating rate loans and related debt instruments automatically adjust at periodic intervals in response to changes in the interest rates and the asset class has become increasingly accessible to advisors and investors thanks to ETFs. The field of bank loan ETFs is getting a new addition today with the debut of the actively managed AdvisorShares Pacific Asset Enhanced Floating Rate Note ETF (NYSEArca: FLRT).
The new ETF is managed by Pacific Asset Management, a wholly owned subsidiary of Pacific Life Insurance. In pursuing FLRT’s investment objective, Pacific Asset Management seeks to provide a high level of current income through selective investments within a portfolio comprised primarily of income producing floating rate loans and floating rate debt securities of non-investment grade companies, which are commonly referred to as bank loans,” according to a statement issued by AdvisorShares.
Floating rate loan ETFs have proven popular with income investors due to robust yields. For example, the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest bank loan ETF with $5.7 billion in assets, has a 30-day SEC yield of 4.07%. The $574.4 million SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), also actively managed, has a 30-day SEC yield of 4.1%. [Senior Loan ETFs Have Rising Rates Appeal]
Senior bank loans are denoted high-yield because the issuing firms are highly leveraged, and highly leveraged companies are more at risk of default and bankruptcy. Nevertheless, these bank loans are slightly safer than traditional high-yield bonds since they are secured by collateral and have historically shown lower default rates.
“We believe FLRT’s strategy will allow more flexibility to enhance returns by utilizing our top-down perspective on loans, which is complemented by of our bottom-up fundamental selection process. We look forward to delivering this approach through a universally accessible actively managed ETF in collaboration with AdvisorShares,” Pacific Asset Management portfolio manager Jason Rosiak in the statement.
FLRT’s management team covers the entire credit spectrum ‘AAA’ to ‘C’, which gives them a unique perspective on relative value and may offer investors favorable risk/reward opportunities. The new ETF focuses on the larger, highest-yielding issuers of floating rate loans.
For the week ending Feb. 13, the nearly 120 U.S.-listed actively managed ETFs had over $18.8 billion in assets under management, according to AdvisorShares data.
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.