Senior Loan ETFs: ‘Steady Returns and Higher Yields’

The popularity of bank loan Exchange Traded Funds (ETFs) continues to soar.

The current market environment seems to be right in bank loan ETFs’ wheelhouse as investors clamor for income while also guarding against the negative impact of rising interest rates.

“Steady returns and higher yields with secured claims to a business’s assets is the attraction for investor’s to this asset class,” S&P Dow Jones Indices said in a note Friday.

BKLN, which is managed by Invesco PowerShares, is the oldest ETF in the group, listing in March 2011. It is also the largest with about $5.2 billion of assets. The fund has a 12-month yield of 4.66%.

BKLN and other bank loan ETFs invest in floating-rate securities, which provide protection when interest rates rise.

“Senior floating-rate bank loans are variable-rate, senior secured debt instruments issued by non-investment-grade companies. Bank loans have a variable rate that adjusts every 30-90 days. The duration of a bank-loan fund is near zero because of the regular adjustment of interest rates. This rate is a fixed-percentage spread over a floating base rate–typically Libor,” explains Morningstar analyst Timothy Strauts in a profile of BKLN.

“Bank loans are the most senior security in the capital structure. They are secured by collateral such as equipment, real estate, or accounts receivable,” he added. “Bank loans are considered safer than traditional high-yield bonds because this secured collateral protects the investor in the event of a default.”

BKLN is one of the top-selling ETFs this year with inflows of more than $3.7 billion, according to IndexUniverse data.

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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