“Plunging oil prices may spell trouble for highly leveraged energy companies — financial strain and default risk could be on the horizon for these companies. Bank loans tend to offer far lower exposure to the sector than high yield bonds,” said Eldridge.
BKLN’s 117 holdings feature some energy issues, but the ETF’s overall energy weight is nowhere close to the 15% to 20% found in more traditional high-yield bond funds.
Over the past year, investors have consistently pulled money from senior loan funds, indicating that they did not believe a Fed rate hike was imminent. However, the interest rate outlook is changing and that could lead investors back to BKLN and rival ETFs.
“For investors still unsure if now is the time to get defensive on rates, even a partial rotation out of high yield and into bank loans could capture some of high yield’s gains in recent months while preparing for potential risks ahead,” adds Eldridge.
PowerShares Senior Loan Portfolio