In a rising interest rate environment, hedging investors are looking to move capital into fixed income ETFs that react in conjunction with interest rates, such as the Invesco Senior Loan ETF (NYSEArca: BKLN), which is garnering interest as of late.
BKLN’s current average volume is 4.2 million, but that has almost doubled recently. Performance has been solid with BKLN up 1.34% year-to-date, up 2.25% for the year and up 2.42% the past three years.
The higher yields offered by senior loans is an attractive option compared to a flattening yield curve by safer government debt.
BKLN tracks the S&P/LSTA U.S. Leveraged Loan 100 Index, which has been on a steady, upward trajectory ever since the Financial Crisis of 2007-08.
With Federal Reserve Chairman Jerome Powell raising the federal funds rate by 25 basis points from 1.75 to 2 and a hawkish outlook on the economy, BKLN can serve as a hedge for a rising interest rate environment–the senior loans that BKLN tracks move in correlation with short-term interest rate moves. However, with that hedge comes more risk in that the loans, though higher-yielding, originate from companies that have a lower investment grade.
Nonetheless, despite the elevated credit risks, these senior loans are deemed safer than high-yield traditional bonds. More interest in ETFs like BKLN underscore the increasing investor appetite for more risk.
“Over the last several years, as yields on high-quality issues have remained low, massive amounts of money have plowed into the more speculative areas of credit: high yield, bank loans and hybrid securities,” said Gary Ribe, Chief Investing Officer at MACRO Consulting Group. “There is more yield and less interest rate risk in these areas, but more economic, credit and liquidity risk.”