High yields and floating rates are among the factors drawing investors to senior loans and related exchange traded funds, such as the PowerShares Senior Loan Portfolio (NYSEArca: BKLN). Strong domestic economic data are also supporting the asset class.
“Floating-rate leveraged loans remain the hottest segment of the fixed-income market. The Credit Suisse Leveraged Loan index was up 4.46 percent through Oct. 11. High-yield funds are experiencing outflows this year, but cash continues to pour into leveraged loan funds,” reports CNBC.
The $7.43 billion BKLN targets the S&P/LSTA U.S. Leveraged Loan 100 Index. That index “is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments,” according to Invesco.
Due to their floating rate component, bank loans are seen as an attractive alternative to traditional high-yield corporate bonds in a rising rate environment. Bank loan securities allow their interest rate to shift, or float, along with the rest of the market, whereas a fixed interest rate stays constant until maturity.
Bank loans are slightly safer than traditional high-yield bonds since they are secured by collateral and have historically shown lower default rates.
Rising Rates Help
Rising interest rates have chastened some high-yield bond investors, prompting those market participants to embrace senior loans.
“With floating rates pegged to the three-month LIBOR, leveraged loans made to non-investment-grade companies protect against rising interest rates. They also retain seniority in the capital structure over bonds,” according to CNBC.