Are Bank Loan ETFs Turning The Corner?

April 18, 2016

Bank loan ETFs may be finally breaking to the upside, thanks to waning fears of default in leveraged credit markets, wider spreads and attractive yields.

Last year, ETFs such as the PowerShares Senior Loan ETF (BKLN | C) and the SPDR Blackstone / GSO Senior Loan (SRLN | C) ended the year with losses of 3% and 1.3%, respectively. On a rolling-12-month basis, these funds remain in the red, as the chart below shows:

But a look at year-to-date performance for 2016 shows that the trend seems to be pointing upward:

Charts courtesy of StockCharts.com

By and large, investors have had a volatile relationship with bank loans—and high-yield bonds—in recent months, due to the negative impact oil prices have had on credit markets. But the appeal of bank loans centers on the fact that they are higher in the corporate structure, and they are floating-rate securities.

That means their coupons adjust with changes in interest rates—something that offers income without much duration risk at a time when the market is concerned about duration exposure in a rising-rate environment.

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