Bank Loan ETFs Still in the Groove as Interest Rates Rise

ETF Trends

ETFs logged record outflows last month but that didn’t stop investors from pumping nearly $400 million into the largest fund tracking bank loans as interest rates continue to creep higher.

PowerShares Senior Loan Portfolio (BKLN) is the largest ETF in the category with about $5.3 billion of assets. Investors have been favoring bank loan ETFs as a yield play with protection from rising rates since the funds invest in floating-rate securities. [Bank Loan ETFs Keep Growing]

BKLN is paying a 12-montn yield of 4.66%, according to manager Invesco PowerShares. [Bank Loan ETFs for Yield and Rising Rate Hedge]

Other ETFs for this sector include Highland/iBoxx Senior Loan (SNLN), SPDR Blackstone/GSO Senior Loan ETF (SRLN) and First Trust Senior Loan Fund (FTSL).

BKLN gathered $399.2 million of net inflows in August, according to IndexUniverse data. The other senior loan ETFs also saw net inflows, while the overall business experienced record redemptions. [Vanguard Sidesteps Record Monthly Outflow for ETFs]

In fact, BKLN is one of the best-selling ETFs in 2013, pulling in nearly $3.9 billion.

“Interest rates have ticked up this year as the economy has continued to gradually improve and, more recently, in response to the Federal Reserve’s signal that it may reduce the pace of its bond purchases. During this span, BKLN has performed exactly as expected. Rising rates have had very little effect on the price of bank loans, given that their duration tends to be very near zero,” says Morningstar analyst Timothy Strauts in a report on the ETF. [Treasury ETFs Drop as 10-Year Yield Nears 3%]

The sector’s biggest risk is the potential for a U.S. recession in the near future, which could trigger defaults in low-credit-quality senior loans. “Bank loans are denoted as ‘high yield’ in large part because the firms issuing them are highly leveraged,” Strauts notes.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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