Renewed Enthusiasm For Bank Loan ETFs

With investors continuing their search for income and yield, bank loan or senior loan exchange-traded funds are seeing some renewed interest. The largest bank loan ETF is the PowerShares Senior Loan Portfolio BKLN.

BKLN, which tracks the PowerShares Senior Loan Portfolio tracks the S&P/LSTA U.S. Leverage Loan Index, is an alternative to traditional high-yield corporate bond funds and one that often receives attention when investors expect Treasury yields to rise.

“Unlike fixed-rate instruments, the coupons of floating rate bank loans adjust upward as interest rates rise – providing investors with the potential of an attractive source of current income,” according to PowerShares. “With their floating rate coupons and low durations, senior loans may offer compelling yield potential.”

A Small, But Successful Niche

There are just four ETFs dedicated to senior loans, but each member of the quartet can be considered successful. BKLN is the king of the group with over $8.8 billion in assets under management. The smallest of the four bank loan ETFs is the Highland iBoxx Senior Loan ETF SNLN, which has over $550 million in assets under management.

The other two senior loan ETFs are the actively managed SPDR Blackstone/GSO Senior Loan ETF SRLN and the First Trust Senior Loan Fund FTSL. FTSL is also actively managed. That pair of senior loan funds have over $2.3 billion in combined assets under management.

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“SRLN and FTSL have reeled in $745 million and $523 million respectively year-to-date, and SNLN a much lesser $83 million during this time frame,” said Street One Financial vice president Paul Weisbruch in a note out Tuesday. 

It's About The Yield

Not surprisingly, investors are typically drawn to an ETF such as BKLN for yield. The PowerShares ETF has a 30-day SEC yield of almost 3.3 percent. However, some bond market observers currently advocate traditional junk bonds over senior loans.

“Regardless, there is obviously investor appetite across the board for these funds and this segment in general, which basically has been the steady trend since these funds debuted several years back and there is likely opportunity for new entrants and perhaps new approaches here given the momentum,” said Weisbruch.

Nearly 97 percent of BKLN's holdings have maturities of one to five years or five to 10 years. Ninety-four percent of the ETF's holdings are rated B, BB or BBB.

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