Top 3 Bank Loan ETFs (SRLN, BKLN)
Bank loan, or senior loan, exchange-traded funds, or ETFs, offer exposure to the private debt securities market. These ETFs generally seek to provide investment results corresponding to their respective underlying indexes. Senior bank loans are issued by one or more banks or financial institutions, and pay interest at a floating rate determined periodically at a specified premium above a base rate; a commonly used base rate is the London Interbank Offered Rate, or LIBOR. Consequently, these ETFs may serve as a hedge against interest rate risk since the rates are set at a premium and are reset every period as determined by the financial advisers.
Senior bank loan ETFs generally invest in senior loans with credit ratings below investment grade. Since these ETFs invest in below investment-grade loans, they carry a higher degree of risk. To compensate for the high risk, bank loan ETFs tend to pay higher yields. Senior bank loans are senior to all unsecured claims against the borrower, and are senior or equal to all other secured claims. Therefore, senior loans and other first lien claims are entitled to be repaid first out of proceeds of the assets securing the loans. As a result, these ETFs carry a low to moderate degree of default risk.
SPDR Blackstone / GSO Senior Loan ETF
The SPDR Blackstone / GSO Senior Loan ETF (NYSEARCA: SRLN) is an actively managed ETF seeking to outperform the Markit iBoxx USD Liquid Leveraged Loan Index, its primary benchmark index, and the S&P/LSTA U.S. Leveraged Loan 100 Index, its secondary benchmark index. SRLN provides exposure to noninvestment-grade, floating-rate senior bank loans of U.S. and non-U.S. corporations, and expects to maintain an average duration of less than 90 days.
SRLN was issued on April 3, 2013, by State Street Global Advisors, the ETF's investment manager. SRLN is subadvised by GSO / Blackstone Debt Funds Management and charges a competitive net expense ratio of 0.7%. SRLN seeks to achieve its investment objective by investing approximately 50 to 75% of its total net assets in component securities of its primary and secondary indexes. The ETF's subadviser seeks to construct a portfolio of debt securities with a lower level of volatility than the loan market.
As of Aug. 31, 2015, SRLN has a weighted average days to reset of 39; a weighted average LIBOR floor of 0.99%; a dividend yield of 4.21%; and an average maturity of 4.97 years. Based on SRLN's characteristics, it is best-suited for fixed-income investors with moderate degrees of risk tolerance who seek exposure to the senior bank loan market, while receiving income and preserving capital. The ETF is also suitable for investors who wish to diversify their equity portfolios and hedge against interest rate risk.
PowerShares Senior Loan Portfolio
Issued on March 3, 2011, by Invesco, the PowerShares Senior Loan Portfolio (NYSEARCA: BKLN) seeks to provide investment results corresponding to the general performance of the S&P/LSTA U.S. Leveraged Loan 100 Index, its underlying index. BKLN is advised by Invesco PowerShares Capital Management and subadvised by Invesco Senior Secured Management. The fund charges a competitive net expense ratio of 0.65%, in comparison to the average expense ratio of bank loan funds of 0.72%.
achieve its investment objective, BKLN generally invests at least 80% of its total net assets in senior loans comprising its underlying index. BKLN's benchmark index includes 100 of the largest senior bank loans with floating coupon rates. As of Sept. 1, 2015, BKLN has 114 holdings and assets of $4.97 billion. The fund invests 84.9% of its portfolio in loans, 7.69% in cash and cash equivalents, and 7.42% in high-yield securities. BKLN's holdings are capped at 2% for each holding, which helps to diversify the portfolio.
BKLN has a yield to maturity of 5.91%; an average days to reset of 36.73; a weighted average maturity of 4.72 years; and a 30-day SEC yield of 5.06%. As of Aug. 31, 2015, based on trailing three-year data, BKLN has a standard deviation, or volatility, of 2.26%; an annualized return of 2.46%; and a Sharpe ratio of 1.08. In terms of modern portfolio theory, or MPT, BKLN is best-suited for low to moderate risk-tolerant, fixed-income investors who seek exposure to the 100 largest senior bank loans, while hedging against interest rate risk and generating income. BKLN is best-suited as a small satellite holding in a well-diversified portfolio of fixed-income securities.
Highland/iBoxx Senior Loan ETF
The Highland/iBoxx Senior Loan ETF (NYSEARCA: SNLN) was issued on Nov. 8, 2012, by Highland Capital Management. Highland Capital Management Fund Advisors, LP serves as the investment adviser of SNLN and charges a competitive net expense ratio of 0.55%. SNLN seeks to provide investment results corresponding to the general price and yield performance of the Markit iBoxx USD Liquid Leveraged Loan Index, the fund's underlying index.
The Markit iBoxx USD Liquid Leveraged Loan Index is a rules-based index comprised of approximately 100 of the largest and most-liquid leveraged loans. The index is measured based on the U.S. dollar face amount of outstanding senior loans issued and the number of market participants trading these securities. SNLN's fund adviser measures loans based on credit rating, time to maturity, type, size, liquidity and spread.
As of July 31, 2015, SNLN generated an annualized market price return of 2.81% since its inception, while its underlying index generated a return of 2.99% over the same period. To provide similar returns as its underlying index, SNLN employs a representative sampling indexing strategy. Rather than investing in all securities comprising the underlying index, SNLN invests in a subset of securities in its underlying index with a similar investment profile, in aggregate, to the index. Under normal circumstances, SNLN invests at least 80% of its total net assets plus borrowings for investment purposes in below-investment-grade senior loans. SNLN's adviser expects the fund's tracking error to be no greater than 5% over time.
As of July 31, 2015, SNLN has a yield to maturity of 5.88%; a weighted average maturity of 4.62 years; a weighted average coupon of 4.33%; and a 30-day SEC yield of 4.45%. Based on SNLN's characteristics, it is best-suited for investors seeking diversified exposure to the floating rate, below-investment-grade senior bank loan market, while generating a moderately high yield. Like other bank loan ETFs, SNLN can serve as a hedge against interest rate risk due to its periodic resetting of rates.
Category: Bank loan