Bank Loan ETFs Are Direct Yield-Generating Courses

Bond market angst is running high this year. Blame rising interest rates and persistent inflation, but there are avenues for investors to cope with this situation while generating decent yields.

Those include bank loans or senior loans — an asset class accessible via several exchange traded funds, including the Invesco Senior Loan ETF (BKLN B).

Bank loan ETFs are topping Treasuries and have been doing so since government bond yields bottomed in August 2020. The floating rate note (FRN) component found in BKLN and rival funds is a primary reason why these products stand out as premier bond ideas against the backdrop of rising rates. Nearly all of BKLN’s components have maturities of one to five or five to 10 years.

“Loans tend to have floating rate provisions and reset as yields move higher. In our view, these products are the model Prudent Yield example,” says Bank of America in a recent report.

As of April 8, the $5.63 billion BKLN sports a 30-day SEC yield of 3.13%, which is high in the current environment. That’s attributable to the fact that the bulk of bank loans are classified as junk bonds. BKLN reflects as much, as 83% of its 139 holdings are rated BB or B. Fortunately, credit conditions are supportive of high-yield fare.

“Credit conditions remain strong while rates are expected to move higher over the next year or more. Assets like leveraged loans and fallen angel bonds have an attractive mix of low duration and high yield, particularly compared to government bonds, TIPS, and investment grade credit,” adds Bank of America.

Bank of America’s Jared Woodard notes that the B-rated universe is the firm’s preferred credit quality at the moment. That could prove to be positive for funds such as BKLN, particularly as fixed income investors look for credit opportunities that also reduce rate risk — boxes checked by bank loan funds.

It’s easy to understand the allure of BKLN in the current market setting because the fact is that a slew of other, higher-quality bond strategies just aren’t delivering for investors.

“Over the past two years, Treasury bonds have lost more than 20% of their value and global government bonds are set for the worst losses since 1949. More than half of all Treasury bear markets have happened since 2009,” concludes Bank of America. “Other ‘safe’ corners of fixed income like IG corporates and high-quality munis are also struggling. We expect high prices, a hawkish Fed, and inflationary secular policy shifts (e.g. UBI, student loan forgiveness, CBDCs) to keep bonds under pressure.”

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