Bank Loan ETFs: Shelter from the Rising-Rate Storm

Bank loan ETFs are sitting on gains for 2013 while diversified bond funds are in the red due to rising interest rates.

PowerShares Senior Loan Portfolio (BKLN) is one of the best-selling ETFs this year with net inflows of about $3.3 billion. It is the largest bank loan ETF with assets of $4.8 billion.

BKLN and other bank loan ETFs have been popular with investors seeking yield and protection from rising rates. The funds have delivered on both fronts.

BKLN is yielding more than 4%.

Bank loans “have tended to have low average default rates versus high-yield bonds, above-average yields, and very low duration (given that they pay floating rates), are negatively correlated to Treasury bonds, and have historically generated above-average returns in rising interest-rate environments,” writes Morningstar ETF analyst Timothy Strauts in a commentary posted Wednesday.

Investors have been “pouring money into bank-loan funds” as interest rates rise, Strauts notes. After dipping below 1.7% in early May, yields on 10-year Treasury notes have vaulted to around 2.6%.

“Rising rates have had very little effect on the price of bank loans, given that their duration tends to be very near [zero]. And given that the economy has continued to improve, the default rate within the sector over the past year has been just 1.4%,” the Morningstar analyst said.

Source:  John Spence, ETF Trends

PowerShares Senior Loan Portfolio (BKLN) is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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