Although many investors shy away from bond ETFs in this low rate
environment, there are still a number of quality choices in the
fixed income ETF world. These products can help investors to reduce
dependence on equities while providing a nice regular payment far
above what most stocks can deliver at this time.
This is especially true if investors are willing to venture
outside of the investment grade market and into junk securities
instead. While these bonds are riskier, they give investors
outsized payouts which can help to greatly increase current income
for any portfolio (see
Is The Bear Market For Bond ETFs Finally Here?
).
In the junk bond space, there is an often overlooked slice of
the market that could be an interesting choice for those with
minimal levels of exposure to the market. This corner is what is
known as senior loans or 'leveraged loan' market, a specific corner
of the below investment grade world.
These notes are, generally speaking,
floating rate bonds
which see rates adjust on a monthly or quarterly basis. However,
they are often made by companies that are already heavily in debt
suggesting big risks. Nevertheless, these senior loans are, as you
might expect, 'senior' to other types of debt and are among the
first to be paid out in a liquidity event.
Given the interest rate resetting feature and the low credit
quality of the bonds in this segment, these loans can provide
investors with both a hedge against rising interest rates but also
higher levels of income than other types of floating rate
securities (read
Do You Need A Floating Rate Bond ETF?
).
Thanks to this, senior loans could be a nice mix between high
income and lower interest rate sensitivity making them ideal
investments for many investors.
Unfortunately, the senior loan market is still pretty small and
thus somewhat difficult for investors to buy into. However, there
is one dedicated ETF that is currently tracking the space the
PowerShares Senior Loan Portfolio (
BKLN
)
.
This relatively new bond ETF is currently the only way investors
have to play the senior loan market via the ETF structure. The
product tracks the S&P/LSTA U.S. Leveraged Loan 100 Index which
looks to act as a benchmark for the largest institutional leveraged
loans based on market weightings, spreads, and interest payments
(see more on ETFs at the
Zacks
ETF Center
).
Currently, the ETF holds about 120 securities in total with the
vast majority maturing in between one and ten years. With this
approach, the fund has a SEC 30 Day Yield of about 4.8% while
interest rate risk is minimal; the average days to reset is just
over 33.5.
However, investors should note that the product is relatively
expensive when compared to other ETFs focused on the low end of the
debt market. The current expense ratio is 76 basis points a year,
triple some of the low cost junk bond ETFs.
Fortunately, the AUM is high at about $415 million, promoting
high levels of interest from traders. In fact, volume is generally
at 160,000 shares per day, giving the fund an extremely low bid ask
spread (also read
ETF Investors: Beware The Coming ETN Backlash
).
Yet the real test for this product is when investors put it up
against one of the more popular junk bond ETFs on the market today,
the
SPDR Barclays High Yield Bond ETF (
JNK
)
.
In terms of yield, JNK crushes its counterpart, paying out over
200 basis points more a year in income. Additionally, from a
performance perspective, JNK has easily beaten out its counterpart
over the past year:
With that being said, investors should note from the chart above
that JNK has been far more volatile than its bank loan counterpart,
experiencing greater moves in short time periods. Thanks to this
volatility, as well as the higher interest rate risk in JNK, some
investors might still want to consider BKLN for their exposure (see
Top Three High Yield Junk Bond ETFs
).
That is because BKLN looks to a lower risk choice in the space
while still providing high income levels than many investment grade
products. So if investors are willing to forgo a little in income
and pay more in fees, BKLN could be an interesting choice for some
investors.
While it has trailed some of its counterparts in the past, the
product looks well poised to take advantage of a rising interest
rate environment in the future, especially when compared to its
peers in the junk bond ETF space.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
.
Click to get this free report >>
To read this article on Zacks.com click here.
Zacks Investment
Research
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report