Today’s low yield and low default environment is a boon for high-yield debt strategies. Leveraged loans and the Invesco Senior Loan ETF (NYSEArca: BKLN) are certainly part of that conversation.
BKLN, which tracks the S&P/LSTA U.S. Leveraged Loan 100 Index, offers income investors an array of benefits relative to traditional high-yield corporate debt exchange traded funds.
“Leveraged loans currently offer a higher yield relative to most other fixed income asset classes and sit at the top of the corporate capital structure, which has led to lower price volatility versus other subordinated parts of the capital structure, such as high-yield bonds,” according to Fidelity research.
Exploring Leveraged Loans, BKLN
BKLN yields 3.22%. These days, that’s solid, but it’s also well below the yield on the widely followed Markit iBoxx USD Liquid High Yield Index. Part of that gap is attributed to leveraged loans residing higher up the capital structure than standard junk bonds.
However, BKLN has avenues for making up that yield gap. For example, the floating rate component found in senior loans makes the asset class a beneficiary of rising Treasury yields.
“Further, given their floating rate coupons, leveraged loans exhibit a very low duration and historically have shown positive correlation with inflation and negative correlation with U.S. Treasuries,” notes Fidelity.
Adding to the allure of BKLN today is the specter of inflation. Inflation can give way to higher interest rates, which as noted above can benefit leveraged loans, but there’s more to the story regarding BKLN’s merit as an inflation-fighting tool for income-hungry investors.
“Leveraged loans, with their floating rate coupons and higher credit spreads, offer features that can help offset the downward price pressure inflation exerts on fixed-rate bonds. Given this potential for better relative outcomes in an inflationary world, loans may be worth a closer look,” adds Fidelity.
The $6.48 billion BKLN holds 144 bank loans, 92% of which are rated BBB, BB, or B on the S&P scale, according to issuer data. The bulk of the fund’s holdings have maturities of one to five years or five to 10 years though the weighted average maturity is 4.92 years. Lastly, as Fidelity notes, there are also diversification benefits available with leveraged loans.
“With low correlations to many other asset classes, leveraged loans may offer additional portfolio diversification. This relationship stems from leveraged loans’ unique characteristics, most notably seniority in the issuer’s capital structure, collateral protection, and floating rate coupons,” according to the fund giant.
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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.
