Bank loan ETFs are conservative yield-generating avenues

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BMarket anxiety is at its height this year. Blame rising interest rates and persistent inflation, but there are ways for investors to deal with this situation while generating decent returns.

These include bank loans or senior loans – an asset class accessible through several exchange-traded funds, including the Invesco Senior Loan ETF (BKLN).

Bank loan ETFs are outpacing Treasuries and have done so since government bond yields bottomed in August 2020. The floating rate note (FRN) component found in BKLN and rival funds is l a key reason why these products stand out as leading bond ideas in the context. of rising rates. Almost all components of BKLN have maturities of one to five years or five to ten years.

“Loans tend to have variable rate provisions and reset as yields increase. In our view, these products are the epitome of Prudent Yield,” Bank of America said in a recent report.

As of April 8, the $5.63 billion BKLN is showing a 30-day SEC yield of 3.13%, which is high in the current environment. This is because most bank loans are classified as junk bonds. BKLN reflects this, as 83% of its 139 holdings are rated BB or B. Fortunately, credit conditions are favorable for high yield rates.

“Credit conditions remain strong as rates are expected to rise over the next year or more. Assets such as leveraged loans and fallen angel bonds present an attractive combination of low duration and high yield, especially relative 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 company’s preferred credit quality at the moment. This could prove positive for funds such as BKLN, especially as fixed income investors seek credit opportunities that also reduce interest rate risk – boxes ticked by bank loan funds.

It’s easy to see the appeal of BKLN in today’s market environment, because the fact is that many other higher-quality bond strategies simply don’t measure up to investors.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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