Banking on Bank Loan ETFs

Amid liquidity concerns, bank loan, or senior loan, exchange traded funds have taken some lumps this year, but with fears of higher interest rates still prominent, investors should not ignore this once beloved corner of the fixed income market.

Since the senior loans have rates that adjust periodically, the floating-rate loans offer investors an alternative method of earning yields with little or no interest-rate risk. Due to their floating rate component, bank loans are seen as an attractive alternative to traditional corporate bonds in a rising rate environment.

The interest rate flexibility offered by ETFs such as the PowerShares Senior Loan Portfolio (NYSEArca: BKLN) and the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) and the Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN) has been displayed during previous spikes in ten-year year Treasury yields. [Bank Loan ETFs Back in Style]

For example, in 2013, BKLN returned 4.1% while SRLN, which debuted in the second quarter of that year, gained 1.8% while the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) and the Vanguard Total Bond Market ETF (NYSEArca: BND) lost 13.4% and 2.1%, respectively. Interestingly, bank loan ETFs like BKLN, SRLN and SNLN hold high-yield bonds, but that did not lead to increased volatility when Treasury yields surged two years ago.

Volatility for BKLN and SRLN in 2013 averaged just 1.75% while TLT’s volatility was 13.1%. The 2013 volatility on the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) was 6.2%, according to ETF Replay data.

Lower default rates could continue supporting bank loan ETFs.