State Street Global Advisors, the second-largest U.S. ETF provider by assets, today is launching an actively managed senior loan ETF that will enter a growing space currently dominated by the passive $3.0 billion PowerShares Senior Loan Portfolio (BKLN).
The SPDR Blackstone/GSO Senior Loan ETF (SRLN), which has annual fees of 0.90 percent, is designed to outperform the S'P/LSTA U.S. Leveraged Loan 100 Index and the Markit iBoxx USD Liquid Leveraged Loan Index through a portfolio that is roughly 80 percent allocated to senior loans primarily made to businesses operating in North America.
Senior loans generally have risk profiles that are similar to below-investment-grade securities. What sets them apart is that they have a right to payment before most other debts a borrower has, meaning senior loans have higher recovery rates than other below-investment-grade debt should a company default on its debts.
Investors have embraced these strategies as not only a source of income at a time when other traditional fixed-income instruments have paltry returns, but as a good hedge against interest-rate risk. Indeed, senior loans offer a hedge to rising rates because, unlike fixed-rate bonds, their yields adjust upward as rates rise.
State Street is hoping active management will give it an added edge in the space, as in the loan market it is common to see 30 to 35 percent of loans fall out of an index in any given year, the company said in a press release.
"Given the high turnover of senior loans and the critical importance of credit selection, we believe an active strategy provides a key advantage to investors who want access to this corner of the market," State Street's global head of SPDR ETFs James Ross said in the release.
PowerShares’ BKLN has seen its assets double year-to-date, having attracted a massive $1.55 billion since the beginning of the year. Another relatively newcomer to the space, the Highland/iBoxx Senior Loan ETF (SNLN), has gathered $30 million so far this year, and now has $54.3 million in total assets.
SRLN will invest primarily in loans made to businesses in North America, but may include senior loans to businesses abroad.
Blackstone, the fund’s subadvisor, will look to build a portfolio that is less volatile than the general leveraged loan markets, the company said in the prospectus .
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