Senior loans and the related ETFs can help fixed income weather storms created by rising interest rates while maintaining a solid income profile, but there are some liquidity concerns that go along with this corner of the bond market.

The Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN) prioritizes senior loans with robust liquidity. SNLN tracks the Markit iBoxx Liquid Leveraged Loan Index.

Senior secured floating-rate bank loans are seen as a way for fixed-income investors to maintain yield generation while hedging rate risk. Senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates. Because rates are typically reset once per quarter, senior loans typically have low durations. Since the senior loans have rates that adjust periodically, the floating-rate loans also offer investors an alternative method of earning yields while mitigating interest-rate risk.

SNLN & Most Liquid Senior Loans

A senior loan is a private loan a firm takes from an underwriting bank or a syndicate of lenders. The loans are also secured in that they are backed by the borrowers’ assets, which act as collateral. If the borrower defaults, lenders have a senior claim on the defaulters’ assets.

SNLN holds 100 of the largest and most liquid senior loans.

Loans eligible for inclusion in the fund are “measured by the number of active market participants trading the security and the dollar face amount of outstanding senior loans issued,” according to the issuer. “Loans eligible for inclusion in the Underlying Index are measured by type, size, liquidity, spread, credit rating and minimum time to maturity.”

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