How bank loan ETFs can help investors as rates rise

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BTruth be told, the first quarter was a dark time for fixed income investors, and things may not get much better with the specter of up to six more interest rate hikes looming in the future. course this year.

However, not all bond segments are doomed as rates. Some are designed to thrive in these environments, including floating rate notes (FRNs). Of course, the trade-off investors make when adopting a short-duration rate is low yield. Bank loans or senior loans are a way to reduce duration risk while maintaining exposure to credit opportunities.

The asset class is accessible through active and passive exchange-traded funds, including the Invesco Senior Loan ETF (BKLN).

“Bank loans, or leveraged loans, are private loans taken out by companies from banks or a syndicate of lenders. Borrowers often have credit ratings below investment grade. As such, they will often offer an additional return to offset their credit risk,” notes Lan Anh Tran, Morningstar analyst.

BKLN tracks the S&P/LSTA US Leveraged Loan 100 Index. The $5.53 billion ETF turned 11 last month, making it the oldest statesman in the ETF category. Bank loan. Importantly, BKLN delivers when it comes to earnings. The Invesco fund is posting a 3.25% 30-day SEC yield, which is impressive given that interest rate risk is not an issue BKLN faces.

Of course, bank loans are not the ideal asset class. As noted above, there is credit risk, and critics often note that liquidity isn’t always easy to come by in this corner of the bond market. Covenant-lite loans are another point to consider.

“This usually means fewer conditions are in place to protect lenders. More often than not, this means waiving maintenance clauses that subject borrowers to regular financial testing. This could reduce recovery rates in the event of default. The prevalence of lean loans has increased in recent years as soft loan markets have made market supply more competitive,” adds Morningstar’s Tran.

As far as liquidity is concerned, it is true that bank loans are not traded as dynamically as traditional corporate bonds, but this only underlines the advantages of a product such as BKLN compared to stock picking. individual broadcasts in this space. The fund holds 139 Senior Loans, indicating that the entire basket is unlikely to succumb to one major liquidity event at once. The fund also avoids CCC-rated junk debt most of the time, as BBB, BB and B-rated loans combine for 94% of the portfolio.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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