Senior loans can be attractive options for fixed income investors looking for the combination of solid yields and some protection against rising rates. Among exchange traded funds, the Invesco Senior Loan ETF (NYSEArca: BKLN) was the first to make senior loans accessible to investors via the ETF wrapper.
BKLN, which turned seven years old earlier this year, follows the S&P/LSTA U.S. Leveraged Loan 100 Index. That benchmark “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.
BKLN Senior Loan Benefits
A senior loan is a private loan taken from an underwriting bank or a syndicate of lenders. The loans are 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. Moreover, senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates.
The $7.90 billion BKLN has 113 holdings and the days to reset is just over 21 days. Three-month LIBOR is 2.35%.
Since rates are typically 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 offer investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute to traditional corporate debt in a rising rate environment.