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The prospect of higher interest rates for a longer-than-expected period has made investors choosy about their investment plans. In such a scenario, investing in senior loans could prove beneficial.
Senior loans are floating rate instruments and thus pay a spread over the benchmark rate like LIBOR, helping to eliminate interest rate risk. This is because when interest rate rises, coupons on senior loans increase while the value of the bonds decline, keeping investments stable. Since these loans are issued by companies with below investment-grade credit ratings, they usually pay yields in order to compensate for this risk.
Given this, senior loans ETFs provide a convenient way to get broad exposure to a particular market segment. In the case of senior loan ETFs, investors can access a diversified portfolio of senior loans without having to buy individual loans. These include SPDR Blackstone Senior Loan ETF (SRLN - Free Report) , Invesco Senior Loan ETF (BKLN - Free Report) , First Trust Senior Loan Fund (FTSL - Free Report) , Franklin Senior Loan ETF (FLBL - Free Report) and Virtus Seix Senior Loan ETF (SEIX - Free Report) .
Here are some reasons why investors should consider adding senior loan ETFs to their investment portfolio:
Interest Rate Protection: Senior loans typically have floating interest rates that reset periodically. This means they are less sensitive to interest rate fluctuations compared to fixed-rate bonds. As a result, senior loan ETFs can offer protection against rising interest rates (read: 5 Ways to Hedge Against Inflation With ETFs).
Higher Yield Potential: Senior loans generally yield more than other fixed-income instruments, especially those from higher-rated entities. This is because they are often issued by companies with lower credit ratings.
Seniority in Capital Structure: In the event of bankruptcy or liquidation, holders of senior loans are typically among the first to be repaid. This seniority can offer some protection against credit risk.
Diversification: Senior loan ETFs can add diversification to an investment portfolio, especially to those seeking exposure to the credit market without the interest rate sensitivity that comes with traditional bonds.
Hedge Against Inflation: Since the interest rates on senior loans adjust periodically, they can serve as a potential hedge against inflation. As rates rise in an inflationary environment, the interest on senior loans would adjust upward as well (read: 5 Ways to Hedge Against Inflation With ETFs).
SPDR Blackstone Senior Loan ETF is an actively managed ETF seeking to outperform the Markit iBoxx USD Liquid Leveraged Loan Index and the S&P/LSTA U.S. Leveraged Loan 100 Index by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Senior Loans. It holds 452 bonds in its basket with an average maturity of 4.61 years.
With AUM of $4.6 billion, SPDR Blackstone Senior Loan ETF trades in an average daily volume of 1.3 million shares and charges 70 bps in annual fees.
Invesco Senior Loan ETF follows the Morningstar LSTA US Leveraged Loan 100 Index, which is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments. It holds 129 securities in its basket with an average maturity of 4.30 years.
Invesco Senior Loan ETF has amassed $4.2 billion in AUM and charges 65 bps in annual fees. It trades in an average daily volume of 6 million shares.
First Trust Senior Loan Fund is an actively managed ETF and invests primarily in a diversified portfolio of first-lien senior floating-rate bank loans. It has key allocations in software, insurance, healthcare technology and media that account for double-digit exposure each.
First Trust Senior Loan Fund has amassed $2.2 billion in its asset base and charges 86 bps in annual fees. It trades in average daily volume of 248,000 shares (read: The New ETF That Protects Against All Market Losses).
Franklin Senior Loan ETF is an actively managed fund, seeking to provide a high level of current income with a secondary goal of preservation of capital. The fund invests at least 80% of its net assets in senior loans and investments that provide exposure to senior loans. FLBL holds 202 bonds in its basket with average maturity of 4.03 years and an effective duration of 0.15 years. Franklin Senior Loan ETF has AUM of $236.9 million and charges 45 bps in annual fees. It trades in volume of 91,000 shares a day on average.
Virtus Seix Senior Loan ETF actively invests in senior-secured, floating-rate leveraged loans, seeking to generate high levels of current income. Time-tested, fundamental research targets the strongest and most undervalued credits, aiming to capture upside potential while limiting downside risk. Virtus Seix Senior Loan ETF has an average maturity of 3.78 years and an effective duration of 0.20 years.
Virtus Seix Senior Loan ETF has managed assets worth $87 million so far and charges 57 bps in annual fees. It trades in average daily volume of 22,000 shares.
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An Introduction to Senior Loan ETFs
The prospect of higher interest rates for a longer-than-expected period has made investors choosy about their investment plans. In such a scenario, investing in senior loans could prove beneficial.
Senior loans are floating rate instruments and thus pay a spread over the benchmark rate like LIBOR, helping to eliminate interest rate risk. This is because when interest rate rises, coupons on senior loans increase while the value of the bonds decline, keeping investments stable. Since these loans are issued by companies with below investment-grade credit ratings, they usually pay yields in order to compensate for this risk.
Given this, senior loans ETFs provide a convenient way to get broad exposure to a particular market segment. In the case of senior loan ETFs, investors can access a diversified portfolio of senior loans without having to buy individual loans. These include SPDR Blackstone Senior Loan ETF (SRLN - Free Report) , Invesco Senior Loan ETF (BKLN - Free Report) , First Trust Senior Loan Fund (FTSL - Free Report) , Franklin Senior Loan ETF (FLBL - Free Report) and Virtus Seix Senior Loan ETF (SEIX - Free Report) .
Here are some reasons why investors should consider adding senior loan ETFs to their investment portfolio:
Interest Rate Protection: Senior loans typically have floating interest rates that reset periodically. This means they are less sensitive to interest rate fluctuations compared to fixed-rate bonds. As a result, senior loan ETFs can offer protection against rising interest rates (read: 5 Ways to Hedge Against Inflation With ETFs).
Higher Yield Potential: Senior loans generally yield more than other fixed-income instruments, especially those from higher-rated entities. This is because they are often issued by companies with lower credit ratings.
Seniority in Capital Structure: In the event of bankruptcy or liquidation, holders of senior loans are typically among the first to be repaid. This seniority can offer some protection against credit risk.
Diversification: Senior loan ETFs can add diversification to an investment portfolio, especially to those seeking exposure to the credit market without the interest rate sensitivity that comes with traditional bonds.
Hedge Against Inflation: Since the interest rates on senior loans adjust periodically, they can serve as a potential hedge against inflation. As rates rise in an inflationary environment, the interest on senior loans would adjust upward as well (read: 5 Ways to Hedge Against Inflation With ETFs).
ETFs in Focus
SPDR Blackstone Senior Loan ETF (SRLN - Free Report)
SPDR Blackstone Senior Loan ETF is an actively managed ETF seeking to outperform the Markit iBoxx USD Liquid Leveraged Loan Index and the S&P/LSTA U.S. Leveraged Loan 100 Index by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Senior Loans. It holds 452 bonds in its basket with an average maturity of 4.61 years.
With AUM of $4.6 billion, SPDR Blackstone Senior Loan ETF trades in an average daily volume of 1.3 million shares and charges 70 bps in annual fees.
Invesco Senior Loan ETF (BKLN - Free Report)
Invesco Senior Loan ETF follows the Morningstar LSTA US Leveraged Loan 100 Index, which is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments. It holds 129 securities in its basket with an average maturity of 4.30 years.
Invesco Senior Loan ETF has amassed $4.2 billion in AUM and charges 65 bps in annual fees. It trades in an average daily volume of 6 million shares.
First Trust Senior Loan Fund (FTSL - Free Report)
First Trust Senior Loan Fund is an actively managed ETF and invests primarily in a diversified portfolio of first-lien senior floating-rate bank loans. It has key allocations in software, insurance, healthcare technology and media that account for double-digit exposure each.
First Trust Senior Loan Fund has amassed $2.2 billion in its asset base and charges 86 bps in annual fees. It trades in average daily volume of 248,000 shares (read: The New ETF That Protects Against All Market Losses).
Franklin Senior Loan ETF (FLBL - Free Report)
Franklin Senior Loan ETF is an actively managed fund, seeking to provide a high level of current income with a secondary goal of preservation of capital. The fund invests at least 80% of its net assets in senior loans and investments that provide exposure to senior loans. FLBL holds 202 bonds in its basket with average maturity of 4.03 years and an effective duration of 0.15 years.
Franklin Senior Loan ETF has AUM of $236.9 million and charges 45 bps in annual fees. It trades in volume of 91,000 shares a day on average.
Virtus Seix Senior Loan ETF (SEIX - Free Report)
Virtus Seix Senior Loan ETF actively invests in senior-secured, floating-rate leveraged loans, seeking to generate high levels of current income. Time-tested, fundamental research targets the strongest and most undervalued credits, aiming to capture upside potential while limiting downside risk. Virtus Seix Senior Loan ETF has an average maturity of 3.78 years and an effective duration of 0.20 years.
Virtus Seix Senior Loan ETF has managed assets worth $87 million so far and charges 57 bps in annual fees. It trades in average daily volume of 22,000 shares.