Consider Senior Loan ETFs Amidst Rising Rates | ETF Trends

The Federal Reserve raised interest rates by 50 basis points last week to fight record inflation, with Fed Chair Jerome H. Powell announcing that “Inflation is much too high,” and that the Federal Open Market Committee is “moving expeditiously to bring it back down.”

Powell added that additional interest rate hikes as high as 0.5 percentage points are “on the table” in the coming months. The recent rate increase is the highest since 2000 and the second of seven hikes forecast for 2022.

However, investors had been pivoting out of fixed income in favor of less rate-sensitive products even before the Fed made this move. While investors have been moving away from fixed income, many are still seeking income.

So, with the Fed set to raise rates even more this year, the demand for floating-rate ETFs remains high. As opposed to ETFs that target fixed-rate bonds, funds focused on floating-rate bonds are less sensitive to rate hikes, since they pay a variable coupon rate based on the prevailing short-term market rates on top of a fixed spread.

Due to the quarterly coupon resets, the duration profile is historically and structurally low when compared to the broader Aggregate bond index.

For investors seeking to manage interest rate risk through an actively managed portfolio of floating-rate loans, the Franklin Liberty Senior Loan ETF (FLBL) could be a good fit. According to the fund’s description on ETF Database, FLBL invests in leveraged loans, bank loans, and floating-rate loans, which are often extended to “junk” borrowers with below investment-grade credit ratings. The fund may invest in loans of companies whose financial condition is uncertain, including companies involved in bankruptcy proceedings and restructuring.

“Senior loan ETFs provide a similar level of above average income as high yield corporate bond funds without the same sensitivity to rising interest rates,” said ETF Trends’ head of research, Todd Rosenbluth. “Demand for loan ETFs has been gaining traction with advisors as the Fed has been raising interest rates.”

FLBL has an expense ratio of 0.45%.

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