A Complement To Boring Bond ETFs

Many investors view bonds, particularly U.S. government debt and municipal bonds, as less than exciting. But boring has been beautiful in the fixed income world this year, as the Federal Reserve has consistently held off on raising interest rates.

Of course, there are ways for investors to liven up the fixed income portions of their portfolios while boosting yield and that does not necessarily mean significant increases in risk or major decreases in credit quality. Senior loans, an asset class highlighted in this space Tuesday, are one of way of doing just that.

Senior Loans And Active Management

While active management does not always work in investors' favor, data confirm as much, senior loans are an asset class where active management has some perks. Investors can gain those advantages with the SPDR Blackstone/GSO Senior Loan ETF (SSGA Actice ETF Trust SRLN).

Related Link: A Solid Start For This Bond ETF

“SRLN’s active management allows it to focus on credit selection to avoid a weak or failing senior loan that might be included in a passive strategy. The benefit of this strategy is captured in the chart below, which examines the percent of distressed issues held in SRLN compared with the benchmark S&P/LSTA US Leveraged Loan Index,” said State Street Vice President David Mazza in a note out Tuesday.

Floating Rate Notes And Senior Loans

Floating rate notes and senior loans are unique in that their yield is tied to a benchmark such as LIBOR, rather than being fixed. Loans are also higher on the capital structure than other unsecured obligations, and some even carry floors to insure you earn a respectable yield even if rates stay low. Their coupon rate typically resets every 90 days, resulting in a duration shorter than three months, Benzinga previously reported.

In the event of issuer default, senior loans reside higher on the claims totem pole than traditional corporate bonds or preferred stock, meaning holders of these bonds have higher claims probability if the issuer goes bankrupt.

SRLN, Maturity And Yield

The average maturity of SRLN's 201 holdings is just over five years. SRLN's 30-day SEC yield is nearly 4 percent. Nearly 60 percent of the ETF's holdings are rated between BB- and B.

“Adding SRLN to complement a core fixed income portfolio may provide a source of income, help reduce interest rate risk and improve overall diversification,” added Mazza.