The opportunity presents itself with leveraged loan ETFs
TThe current low yield, low default environment is a boon for high yield debt strategies. Leverage loans and Invesco Senior Loan ETF (NYSEArca: BKLN) are certainly part of this conversation.
BKLN, which tracks the S & P / LSTA US Leveraged Loan 100 Index, offers income investors a range of advantages over traditional high yield corporate debt exchange traded funds.
“Leverage loans currently offer a higher return compared to most other fixed income asset classes and sit at the top of a firms’ capital structure, resulting in lower price volatility per relative to other subordinated parts of the capital structure, such as high yield bonds, ” according to Fidelity research.
Explore Leverage Loans, BKLN
BKLN reports 3.22%. These days it’s solid, but it’s also well below the performance of the widely followed Markit iBoxx USD Liquid High Yield Index. Part of this spread is attributed to leveraged loans residing higher in the capital structure than standard junk bonds.
However, BKLN has ways to close this performance gap. For example, the variable rate component of senior loans makes this asset class a beneficiary of rising Treasury yields.
“In addition, given their variable rate coupons, leveraged loans have a very short duration and have historically shown a positive correlation with inflation and a negative correlation with US Treasuries,” notes Fidelity.
The specter of inflation adds to the attractiveness of the BKLN today. Inflation can give way to higher interest rates, which as noted above can benefit leveraged lending, but there is more to the story regarding BKLN’s merit as as an inflation-fighting tool for income-hungry investors.
“Leverage loans, with their variable rate coupons and higher credit spreads, offer features that can help offset the downward pressure on prices exerted by inflation on fixed rate bonds. Given this potential for better relative performance in an inflationary world, loans may be worth a closer look, ”adds Fidelity.
The $ 6.48 billion BKLN holds 144 bank loans, 92% of which are rated BBB, BB or B on the S&P scale, according to the data of the transmitter. The bulk of the fund’s holdings have maturities of one to five years or five to 10 years, although the weighted average maturity is 4.92 years. Finally, as Fidelity notes, there are also diversification benefits available with leveraged loans.
“With low correlations with many other asset classes, leveraged loans can offer additional portfolio diversification. This relationship stems from the unique characteristics of leveraged loans, including age in the issuer’s capital structure, collateral protection and variable rate coupons, ”according to the fund giant.
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