What's Behind the Recent Junk Bond ETF Pullback

Related: 4 Floating Rate ETFs for an Alternative to Cash

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.

For instance, the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market, has an average 45.09 day to reset period. Other options include the Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN), and actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) and First Trust Senior Loan ETF (NasdaqGM: FTSL).

Junk bond ETFs could see near-term relief if the Trump Administration’s tax reform effort springs back to life, but that is a big “if.”

As jitters arose that tax reform might go the way of health care reform at the same time the market faces a looming debt ceiling debate, risk assets sold off,” said SSgA. “High yield did not lead the way. High yield fell more than large-cap stocks, as represented by the S&P 500 Index. But small-cap stocks, which are more domestically oriented than large caps and tend to have higher taxes, fell more than high yield.”

For more on bond ETFs, visit our Fixed Income category.