The Federal Reserve’s first interest rate hike of 2016, which was delivered earlier this month, and speculation that the U.S. central is aiming for several more rate hikes next year is proving to be good news for at least one segment of income-generating exchange traded funds: Bank loan funds.
The popular PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market, and rival bank loan ETFs have recently been on the receiving end of fresh capital from yield-seeking investors.
A senior loan is a private loan taken from an underwriting bank or a syndicate of lenders. The loans are secured in that they are backed by the borrowers’ assets, which act as collateral. If the borrower defaults, lenders have a senior claim on the defaulters’ assets. Moreover, senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates.
“Bank loans, sometimes called senior loans or leveraged loans, are a type of corporate debt. Investors tend to view bank loan funds as a lower-risk alternative to high-yield bonds because holders are paid first in the event of a default. Flows into and out of these funds tend to correspond with expectations for rising rates, because the loans generally pay investors more as rates rise,” reports Chris Dieterich for the Wall Street Journal. http://www.wsj.com/articles/investors-flood-bets-on-rising-rates-1482785073