Rising interest rates are not necessarily trouble for all areas of the fixed income market. Some exchange traded funds can help bond investors stay the course as borrowing costs climb, including the actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN).
Due to their floating rate component, bank loans are seen as an attractive alternative to traditional high-yield corporate bonds in a rising rate environment. Bank loan securities allow their interest rate to shift, or float, along with the rest of the market, whereas a fixed interest rate stays constant until maturity.
Senior loans, bank loans or leveraged loans may act as an attractive alternative. A Senior loan is a private loan a firm takes from a bank or a syndicate of lenders. The loans are backed by the borrowers’ assets, which act as collateral. If the borrower defaults, lenders have a senior claim on the defaulters’ assets
“These securities sit higher in the capital structure than high yield and offer a floating rate profile that resets every three months, based on movements in LIBOR plus a spread,” according to State Street. “With yields on average over 4.5% (and likely to go higher if the Fed continues raising interest rates), senior loans may be able to harness higher short term rates and mitigate some of the downside risks in credit markets without limiting income generation potential.”
The actively managed bank loan ETF options could provide investors with better exposure as a manager is more freely able to weave in and out of the fixed-income market. For instance, Blackstone/GSO, which subadvises SRLN, is backed by one of the largest senior loan asset managers in the world.
SRLN holds 283 bonds with an average maturity of 5.66 years. The ETF has a 30-day SEC yield of about 4%. Most of SRLN’s holdings carry junk ratings as about 68% of the fund’s lineup are rated BB-, B or B+.
“With a fund like the SPDR Blackstone / GSO Senior Loan ETF (SRLN), investors may be able to seek income generation opportunities while potentially mitigating cyclical credit risks,” adds State Street.
For more information on the credit market, visit our bond ETFs category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.