First Trust, the money manager known for its niche strategies, today is listing an actively managed senior loan ETF that would go head-to-head with passive funds like the $3.7 billion PowerShares Senior Loan Portfolio (NYSEArca: BKLN).
The First Trust Senior Loan ETF (NasdaqGM: FTSL) will own a diversified portfolio that includes issuers with strong credit metrics. It might also invest in other instruments such as floating-rate loans of companies in financial trouble, floating-rate bonds, money market instruments and fixed-rate debt securities.
FTSL’s launch—a fund that has been in the regulatory pipeline for nearly two years—seems well timed to the extent that recent asset flows into ETFs such as BKLN point to strong investor demand for alternative income-generating ETFs.
Indeed, BKLN was the sixth-top asset gatherer for the month of April, according to data compiled by IndexUniverse, and has seen its total assets under management more than double year-to-date.
Other ETFs have followed on BKLN’s success, including the Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN) and the latest newcomer—also actively managed as will be FTSL—and the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN).
Interestingly, State Street’s fund, SRLN, not only beat FTSL to market with a launch earlier in April, but seems to have taken FTSL’s original intended ticker, SRLN—as the fund’s filing suggests.
Senior loans generally have risk profiles that are similar to below-investment-grade securities. What sets them apart is that they have a right to payment before most other debts that a borrower has, meaning senior loans have higher recovery rates than other below-investment-grade debt should a company default on its debts.
Investors have embraced these strategies as not only a source of income at a time when other traditional fixed-income instruments have paltry returns, but as a good hedge against interest-rate risk. Indeed, senior loans offer a hedge to rising rates because, unlike fixed-rate bonds, their yields adjust upward as rates rise.
FTSL sets out to generate high current income by outperforming the S&P/LSTA U.S. Leveraged Loan 100 Index—a market value-weighted benchmark that measures the performance of the largest segment of the U.S. leveraged loan market, and the same index anchoring BKLN—and the Markit iBoxx USD Leveraged Loan Index—an index comprising the 100 most liquid senior loans in the market that also benchmarks SNLN.
When ETF-friendly advisors give advice to prospects, it’s worth noting what they shouldn’t say.
UAE and Qatar leaving iShares frontier ETF ‘FM’ poses problems, but will make the fund better.
BlackRock makes a subtle change to its securities-lending program that all investors should cheer.
How is defining smart beta tricky? Let us count the ways.