On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the Invesco Senior Loan ETF (BKLN) with Chuck Jaffe of “Money Life.” The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund on point for today. The expert to talk about it. Welcome to the ETF of the Week, where we examine new and newsworthy, unique, and intriguing exchange traded funds with Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools and research you need to be a savvy, smart investor in ETFs.
Todd Rosenbluth, great to chat with you again.
Todd Rosenbluth: It’s great to be with you, Chuck.
Chuck Jaffe: Your ETF of the Week is….
Todd Rosenbluth: The Invesco Senior Loan ETF, BKLN.
Chuck Jaffe: BKLN, Invesco Senior Loan ETF. Why this fund now?
Todd Rosenbluth: Well, I live in New York City, so Brooklyn is close enough to home. But this is an ETF that’s exciting to me. It’s seen strong inflows in the first quarter of 2024. It’s among the top 20 fixed income ETFs. You take on some credit risk. In fact, a good amount of credit risk, with single-B exposure. It gets 8% yields in a diversified, liquid way of getting exposure to the fixed income marketplace that you won’t find within your traditional aggregate bond strategy.
So you can amplify your income with this BKLN ETF.
Chuck Jaffe: People hear “senior loans” and they have a thought about what it means. But in terms of an income-producing portfolio, fixed income, etc., do they understand where it fits in? And where would you suggest it fits into a portfolio?
Todd Rosenbluth: Let’s break it down in a couple of different ways. Senior loans tend to be low, less interest rate sensitive. They’re floating rate in nature. So there’s little to no duration or interest rate sensitivity to get 8% income or 8% yield through this strategy. Senior loans are higher up on the cap structure in case there is default. We think this can be either a complement or a replacement to your traditional high yield corporate bond ETF.
You get less interest rate sensitivity. You get a little bit more confidence in case there’s default risk. And you’re touching on something else that’s actually performed relatively well.
Chuck Jaffe: I often ask you, where does the money come from? And you’ve made it clear. A complement or a replacement to high yield. But do you have a preference? Do senior loans replace high yield for a lot of investors? Should they?
Todd Rosenbluth: Right now, it feels as if the Fed is going to keep interest rates where they are for the foreseeable future. We were expecting rate cuts coming into the year — “we” in the broader investment community. They seem to have been delayed. It might not be as frequent — the number of rate cuts going forward heading into 2025.
So, as a result, the less interest rate sensitivity can make sense. You’re not getting rewarded for the rate cuts that you might within high yield, or traditional high yield corporate bond exposure. So we think this can either fit in well if you have the exposure to high yield bonds and you’re willing to take on a little bit more credit risk than you would within the broader aggregate bond index, or if you want to maintain your exposure to fixed income, but be a bit more tactical, given where the Federal Reserve is likely to end up with interest rates over the next six months.
Chuck Jaffe: So does that mean this is a permanent allocation? Or is this is more of a market call? Now, you are not the trend follower that say, Tom Lydon, vice chairman of VettaFi, is. But you’ll tell people, “We’ll do it if you want to do it.” At the same time, this is a fund that has been bouncing off of its 200-day moving average for like the last six months. It’s been close, mostly above it.
But is this a permanent allocation? Or is this something where you make the mental note? If you buy this now, you want to be checking back on it when rate conditions change to see if you still feel comfortable.
Todd Rosenbluth: We think this is probably a tactical approach. Investors should consider this while the Fed is not aggressive in cutting interest rates. If the Fed becomes aggressive in cutting interest rates, you might want to take a more alternative approach towards credit risk by using high yield bond exposure. But I am excited that in the last year and three years that BKLN has performed relatively well versus your traditional high yield bond ETF.
That’s encouraging to me. Again, past performance is not indicative of future results. But it’s nice to see the trend has been in favor towards taking on senior loan exposure within the portfolio.
Chuck Jaffe: Relatively well. Todd, I think we’ve buried the lead here. We’re this far into this conversation and you haven’t said what’s the payoff? I mean, what is this fund yielding?
Todd Rosenbluth: I can’t believe I made it this far in without saying 8%. So this is an 8% yielding strategy. So that’s obviously higher than what you’re getting with Treasuries, or even investment-grade corporate bonds. You’re taking on that credit risk. I mentioned single-B exposure is the primary credit rating for the securities that are inside the portfolio.
So you have to be prepared that this will be volatile relative to other fixed income strategies. But we think BKLN is not an ETF to sleep on.
Chuck Jaffe: In terms of how this fund mixes in, we’re talking about in place of, or in addition to high yield. Same kind of piece of a portfolio? How much would you allow this to be of somebody’s fixed income portion of their allocations?
Todd Rosenbluth: Typically, we find that investors will have a 60% equity, 40% fixed income, maybe even 70/30. As a result, most of that fixed income exposure is going to be an investment-grade strategy, either corporate bonds or aggregate bond strategy. That is a mixture of Treasuries, probably 5%-10% of the overall portfolio should be in speculative grade bonds like BKLN or some of its high yield corporate bond strategies.
You don’t want to take on too much credit risk. You’re not actually getting that safety you think with fixed income.
Chuck Jaffe: But you do want to consider BKLN, the bank loan, the Invesco Senior Loan ETF, as something you might add to your portfolio. It’s the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff, as always. See you next week.
Todd Rosenbluth: I’ll see you next week, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yes, that’s me. You can learn all about my hour-long weekday podcast by going to your favorite podcast app, or by visiting MoneyLifeShow.com. And if you want to make yourself a better investor in exchange traded funds, make sure you go to VettaFi.com and check out the tools there that will help you accomplish your investment goals.
They’re on Twitter or X at @Vetta_Fi. And Todd Rosenbluth, their head of research, my guest, he’s on Twitter too. He is at @ToddRosenbluth. The ETF of the Week is here for you every Thursday. Follow along so you don’t miss one. And until next week, happy investing, everybody.
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