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 (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 (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 (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 (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.