For senior leveraged bank loan exposure, James Reiger, Global Head of Fixed Income at S&P Dow Jones Indices,pointed to the S&P/LSTA Leveraged Loan 100 Index, the underlying index for the PowerShares Senior Loan Portfolio (NYSEArca: BKLN).
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. Additionally, due to their floating rate component, bank loans are seen as an attractive alternative to traditional corporate bonds in a rising rate environment.
“When interest rates rise, so do the coupons, with some floating rate coupons subject to floors, or lower boundaries,” according to Invesco PowerShares. “The lower duration of senior loans has typically exposed investors to less overall price volatility than high yield bonds. Floating rate loans has typically been less sensitive to changes in interest rates than high yield bonds.”
BKLN has an average 33.55 day reset period – the average number of days until the floating component of the loans reset. The ETF also comes with an attractive 6.05% 30-day SEC yield. The underlying index only has a 1.5% tilt toward the oil & gas sector and 3.5% in metals & mining, another area that faces rising default risk in face of low industrial metals prices.
Additionally, Eldridge mentioned that the variable rate market for high-yielding preferreds exhibits stable rate risk. While traditional preferred stocks may experience greater rate risk, variable rate preferred securities have lower durations.
For example, the PowerShares Variable Rate Preferred Portfolio Fund (NYSEArca: VRP) usually trades more like bonds with shorter durations, so more conservative investors may find the lower-risk profile appealing. Specifically, VRP has an effective duration of 3.94 years and comes with a 5.19% 30-day SEC yield.
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