The SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) brings active management to senior loans, a corner of the fixed income market that can benefit investors are interest rates increase.
The Federal Reserve has already raised rates twice this year and many bond market observers expect the Fed do so again at its September and December meetings.
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.
“Senior loans have a comparable yield and spread to high yield, but a much lower duration. Senior loans’ floating-rate structure, lower equity sensitivity and seniority in the capital structure have resulted in improved drawdowns over the last 18 months,” said State Street Global Advisors (SSgA) in a note out Friday.
Floating rate senior secured loans
SRLN holds over 300 bonds with an average days to reset of 22 days, a metric that is inline with some of the competing passively managed funds in this category. Over the past three years, SRLN has been less volatile than the largest, passively managed senior loan ETF.
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Over the past three years, SRLN has been less volatile than the largest passively managed senior loan ETF as well as the largest, traditional junk bond ETF.
“Floating rate senior secured loans have outperformed most traditional fixed income categories year-to-date. Coupons on the S&P/LSTA Leveraged Loan Index are at a post-financial-crisis high of 5.47% and are likely to go higher with the Federal Reserve on course to raise rates twice more in 2018,” according to SSgA.
SRLN’s current three-month LIBOR is 2.34%. The ETF’s 30-day SEC yield is 4.69%.
For more information on the fixed-income space, visit our bond ETFs category.