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Senior Loan ETF an Attractive Option in Rising Rate Environment

This article was originally published on ETFTrends.com.

In today's current economic climate, SPDR Blackstone/GSO Senior Loan Portfolio (SRLN) is an attractive option, particularly if the Federal Reserve remains hawkish on any forthcoming data that may signal the inclusion of more interest rate hikes.

All assets under the fund are funneled into the Blackstone / GSO Senior Loan Portfolio, and SRLN's main objective is to outperform a primary and secondary index--the Markit iBoxx USD Liquid Leveraged Loan Index and the S&P/LSTA U.S. Leveraged Loan 100 Index through its investment in senior loans.

Floating Rate Component

In the last six months, the Federal Reserve has been stepping up its interest rate hikes--fueled by a growing economy that is seeing low unemployment levels and rising inflation.

 


Senior Loan ETF an Attractive Option in Rising Rate Environment 1

As such, SRLN takes advantage of any short-term rate hikes with its floating rate component, allowing the yields in the loan portfolio to move in conjunction with interest rates. This provides for a hedge against interest-rate risk versus a fixed rate loan portfolio and maximizes return simultaneously.

Related:  Deconstruct the Aggregate Bond Index with Fixed Income ETFs

Selective Underwriting

SRLN primarily invests in senior loans given to businesses operating in North America, but loans may also originate from businesses operating outside of North America. The Portfolio may invest in senior loans through the loans directly via the primary or secondary market or via participations in senior loans, which are contractual relationships with an existing lender in a loan facility where the loan portfolio purchases the right to receive principal and interest payments.

SRLN seeks to construct a portfolio of loans that are less volatile than the general loan market. In order to maximize loan portfolio performance, SRLN adds or removes loans that it believes will cause the portfolio to outperform or underperform versus the primary and secondary indexes.

The selective loan portfolio must include companies that meet the following criteria:

  • Leading, defensible market positions: SRLN intends to invest in companies that it believes have developed strong positions within their respective markets and exhibit the potential to maintain sufficient cash flows and profitability to service their obligations in a range of economic environments.
  • Investing in companies with positive cash flow: SRLN intends to invest primarily in established companies which have demonstrated a record of profitability and cash flows over several economic cycles.
  • Proven management teams: SRLN intends to focus on investments in which the target company has an experienced management team with an established track record of success.
  • Private equity sponsorship: SRLN will seek to participate in transactions sponsored by what it believes to be high-quality private equity firms.
  • Diversification, concentration and reliance on other lenders: SRLN will seek to invest broadly among companies and industries, thereby potentially reducing the risk of a downturn in any one company or industry having a disproportionate impact on the portfolio.

Senior Loan Priority During Default

The inclusion of senior loans in SRLN's portfolio gives these particular loans first lien priority, meaning in the event of a borrower default, the senior loans are paid first. Higher payment priority assists liquidity in terms of the defaulting borrower having to sell assets in order to pay off creditors--in this case, senior loans within the SRLN portfolio are given higher priority--a viable option especially during a market downturn.

Related: Global Corporate Debt Growing at Rapid Pace

Strong Performance

SRLN has seen positive returns given their total returns year-to-date, the past year and the last three years.

  • Year-to-date: Up 1.62 percent
  • 1-year: Up 3.48 percent
  • 3-year: Up 2.62 percent

For more investment options in fixed income ETFs, visit the Fixed Income Channel.

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