“Bank loans offer the potential for higher yield over other traditional fixed income products, and could be considered a defensive allocation given the security interest in assets pledged by the borrower against the loan,” according to Highland. “Adding a defensive allocation is timely and should be a priority for investors heading into the next phase of the credit cycle, especially given the recent rally in unsecured high yield bonds.”
For example, the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market, has an average 46.99 day to reset period – the average number of days until the floating component of the loans reset. The ETF also comes with an attractive 5.95% 30-day SEC yield.
Along with BKLN, investors may look to the passive index-based Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN). SNLN has a 30.8 days to reset and a 4.6% 30-day SEC yield.
There are also two actively managed options, including the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), which has a 47 days reset period and a 3.85% 30-day SEC yield, and First Trust Senior Loan ETF (NasdaqGM: FTSL), which has a 52.29 days reset period and a 3.87% 30-day SEC yield.
Moreover, bank loans look relatively cheap despite the recent rally in riskier assets. Year-to-date, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) rose 10.1% while BKLN gained 6.5%, SNLN increased 5.7%, SRLN added 4.2% and FTSL returned 5.4%. These senior bank loan ETFs could outperform once markets start pricing in a rising rate outlook.