Bank Loan ETFs For Yield And As A Rising Rate Hedge

by: Tom Lydon

Many have taken up speculative grade debt to augment their portfolio's yield potential. Alternatively, investors can take a look at senior loan exchange traded funds that provide above-average yields while mitigating the effects of higher interest rates.

Senior floating-rate bank loans are a type of variable-rate, senior secured debt instruments issued by below-investment-grade companies. The bank loans have a variable rate that adjusts every 30-90 days and are set at a specific level above LIBOR - the duration of a bank-loan fund is near zero.

Moreover, bank loans are secured by collateral such as equipment, real estate, or accounts receivable, which helps shield investor in the event of a default, according to Zacks.

Senior loans also help diversify an investment portfolio as the asset shows a lower correlation with most other asset classes.

ETF investors have four options to gain exposure to senior bank loans.

PowerShares Senior Loan Portfolio (NYSEARCA:BKLN) tracks the S&P/LSTA U.S. Leveraged Loan 100 Index, which holds the largest institutional leveraged loans. BKLN has a 0.66% expense ratio and a 4.02% 30-day SEC yield. The fund's floating rate component resets on an average 32.3 days.

Top holdings include Forescue Metals 2.0%, First Data Corp. 1.9%, Asurion Corp 1.9%, H.J. Heinz Comp 1.9% and Intelsat Jackson Holdings 4.6%. The ETF has 11.1% in high-yield securities and 88.9% in loans.

Credit quality includes BBB 4%, BB 43%, B 45% and CCC 6%. BBB is considered low investment grade quality, and anything BB and below is speculative grade quality.

Highland/iBoxx Senior Loan (NASDAQ:SNLN) tries to reflect the performance of the Markit iBoxx Liquid Leveraged Loan Index. SNLN has a 0.55% expense ratio and a 5.09% 30-day SEC yield. The fund's floating rate component resets on an average 32 days.

Top holdings include Caesars Entertainment 2.1%, FMG Resources 2.0%, Clear Channel Comm 1.9%, Texas Comp Elect 2017 1.9% and Texas Comp Elect 2014 1.8%.

SPDR Blackstone/GSO Senior Loan ETF (NYSEARCA:SRLN) is an actively managed senior loan ETF that seeks to generate income while preserving capital. It tries to beat the Markit iBoxx U.S. Leveraged Loan 100 Index and S&P/LSTA U.S. Leveraged Loan 100 Index through credit analysis, and timely sales and buys. SRLN has a 0.55% expense ratio and a 2.67% 30-day SEC yield. The fund has a weighted average days to reset of 75.

Top sectors include business services 13.8%, healthcare & pharmaceuticals 10.9%, telecom 9.5%, retail 6.5% and consumer services 4.7%. The fund has 94.3% in loans and 5.7% in bonds.

Credit quality breakdown includes BBB- 2.8%, BB 40% and B 46%.

First Trust Senior Loan Fund (NASDAQ:FTSL) is another actively managed ETF that seeks to generate high current income through senior floating rate bank loans. FTSL has a 0.85% expense ratio and a 4.01% 30-day SEC yield. The fund's floating rate component resets on an average 60.4 days.

Top sectors include health care providers & services 8.9%, media 8.9%, food products 7.3%, hotels & restaurants 6.4% and health care equipment & supplies 6.1%.

Credit quality breakdown includes BBB- 2.5%, BB 30%, B 66% and CCC 3%.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.