With depressed yields on municipal bonds and Treasuries and firming in the high-yield corporate bond market, investors are again taking a look at bank loan funds such as the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN).

SRLN invests in senior loans given to businesses operating in North America and outside of North America. The Portfolio may invest in senior loans through the loans directly via the primary or secondary market or via participation in senior loans, which are contractual relationships with an existing lender in a loan facility where the loan portfolio purchases the right to receive principal and interest payments.

“Income investors have been moving back into this sector in their quest for high yields, as bonds offer little return but significant risk. Loan mutual funds saw their biggest three-week inflows since 2017, totaling some $2.5 billion, according to a Jan. 29 Bank of America research note,” reports Randall Forsyth for Barron’s.

SRLN 1 Year Performance

Why Choose ‘SRLN’ in This Environment?

Since rates are usually 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 offers investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute for traditional corporate debt in a rising rate environment.

Leveraged loans usually attract investors who are looking to generate income in a rising interest rate environment due to their floating rate component. However, central banks and agencies like the International Monetary Fund have warned that credit quality is declining – bank loans are usual for highly leveraged companies and are rated speculative-grade.

“Loans are senior to bonds in corporate capital structure and thus get paid first. Most loans also have floating interest rates, usually tied to a short-term benchmark such as the 90-day London interbank offered rate, or Libor,” according to Barron’s.

By including senior loans in SRLN’s portfolio, the senior loans are paid first. Higher payment priority assists liquidity in terms of the defaulting borrower having to sell assets in order to pay off creditors – in this case, senior loans within the SRLN portfolio are given higher priority – a viable option, especially during a market downturn.

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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.