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Active Advantages With Senior Loans

This article was originally published on ETFTrends.com.

In some corners of the fixed income universe, investors can benefit from adding active management to the equation. That includes senior loans, an asset class that can be tapped with active management via ETFs such as the SPDR Blackstone/GSO Senior Loan ETF (SRLN) .

Due to their floating rate component, bank loans are seen as an attractive alternative to traditional high-yield corporate bonds in a rising rate environment. Bank loan securities allow their interest rate to shift, or float, along with the rest of the market, whereas a fixed interest rate stays constant until maturity.

“A Senior Loan is senior to all unsecured claims against the borrower and senior or equal to all other secured claims, meaning that, in the event of a bankruptcy, the Senior Loan, together with other first lien claims, is entitled to be the first to be repaid out of proceeds of the assets securing the loans, before other existing claims or interests receive repayment,” according to State Street Global Advisors (SSgA).

SRLN is just over five years old and has $3.21 billion in assets under management, making it one of the largest US-listed senior loan funds, actively managed or otherwise.

SRLN Holds Over 300 Bonds

“In pursuing its investment objective, the Portfolio seeks to outperform the Markit iBoxx USD Liquid Leveraged Loan Index (the 'Primary Index') and the S&P/LSTA U.S. Leveraged Loan 100 Index (the 'Secondary Index') by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Senior Loans. For purposes of this 80% test, 'Senior Loans' are first lien senior secured floating rate bank loans,” according to the issuer.

SRLN holds over 300 bonds with an average days to reset of 22 days, a metric that is inline with some of the competing passively managed funds in this category. Over the past three years, SRLN has been less volatile than the largest, passively managed senior loan ETF.

Related: Sink Into Senior Loans With This ETF

Senior loans are typically high-yield bonds, a fact highlighted by over 72% of SRLN's holdings be rated BB-, B+ or B. Even with that exposure, there are ways SRLN's managers work around liquidity concerns.

“While underlying loans have an extended settlement cycle, SRLN's active managers can use their experience in trading and scale in the loan market to short settle if necessary to adequately meet redemptions. SRLN also holds roughly 7% in cash and 4% in high yield bonds to assist in managing daily liquidity,” according to SSgA.

For more information on the fixed-income assets, visit our bond ETFs category.