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Blackstone and State Street Ready Senior Loan ETF

tlydon@globaltrend.com (Tom Lydon)

Blackstone ‘ s GSO Capital Partners and State Street Global Advisors have filed to launch an actively managed exchange traded fund that will hold highly risk and potentially lucrative leveraged loans or “junk” bonds.

The SPDR Blackstone/GSO Senior Loan ETF (NYSEArca:SRLN) will try to outperform the S&P/LSTA U.S. Leveraged Loan 100 Index as it invests at least 80% of its net holdings in Senior Loans, which are first lien senior secured floating rate bank loans. In the event of a bankruptcy, Senior Loans, along with other first lien claims, get repaid first, ahead of other existing claims. SRLN has an expense ratio of 0.9%. [Blackstone Teams with State Street for Senior Loan ETF]

Leveraged loans are extended for those that have already incurred a high amount of debt. Consequently, leveraged loans tend to have higher default rates but also have higher interest rates to reflect the greater risk.

However, loan default rates are well below historical averages and the loans currently offer yields above those of Treasuries and higher-quality corporate debt, reports Katy Burne for Fox Business.

Additionally, investors seeking to hedge against potential future interest-rate hikes are using loans since the assets are priced off a floating benchmark, which rises along with absolute rates.

So far this quarter, leveraged loan issuances hit $82 billion, or 72% of the first quarter’s supply, compared to the $46 billion in junk bonds, or about 50% of new issues in the first quarter, according to S&P Capital IQ data. Furthermore, loan funds attracted $1.3 billion in inflows so far in the second quarter, whereas high-yield mutual funds and ETFs lost $2.8 billion.

Nevertheless, “junk” bonds are still winning on the yields front, providing 7.82%, compared to 6.81% for leveraged loans, according to Credit Suisse.

In the meantime, investors interested in loan ETFs may take a look at the PowerShares Senior Loan Fund (BKLN - News) and the iShares Floting Rate Note (FLOT - News) .

For more information on high-yield debt, visit our high-yield bonds category.

Max Chen contributed to this article.