Since rates are typically reset once per quarter, senior loans typically have low durations – a measure of a bond fund’s sensitivity to changes in interest rates. The floating-rate component also offer investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute to traditional corporate debt in a rising rate environment.
A possible risk with bank loans is that these bonds are not as liquid as U.S. government debt or investment-grade corporate bonds.
“Credit risk worked well for investors last year, and could again if corporate earnings rise and the economy strengthens. The $8.3 billion PowerShares Senior Loan ETF (BKLN) is the biggest and one of the cheapest options, with an expense ratio of 0.65% and a yield of 4.54%,” according to Barron’s.
For more information on the fixed-income market, visit our bond ETFs category.