Why Bank Loan ETFs Offer Yield Opportunity

May 12, 2017

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asser Management.

We think bank loan ETFs offer an attractive risk/reward profile in this challenging fixed-income environment.

Spreads in most credit sectors have recently tightened to levels below their long-term averages, making it harder for investors to get paid for the level and types of risks they are exposed to.

While all spread sectors are relatively expensive compared with their long-term averages, bank loans have not rallied as strongly as other high-yield bonds, making them an interesting option in the high-yield space.

Floating Coupons

Additionally, bank loans are issued with floating coupons, making them favorable in an environment where short-term rates are likely to increase. With rising short-term rates, strong demand and relative value within the high yield-arena, bank loans offer an attractive risk/reward profile, in our opinion.

Bank loans have also benefited from a strengthening economy and credit outlook, as well as potential continued growth from fiscal stimulus. Job creation remains healthy, and the unemployment rate continues to fall, with the economy at full employment.

 

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