Invesco PowerShares, the Wheaton, Ill.-based exchange-traded fund firm best known for its PowerShares QQQ ETF (Nasdaq: QQQQ) of the 100 biggest Nasdaq companies, filed papers with the Securities and Exchange Commission to launch an ETF that invests in speculative bank loans.
The PowerShares S&P Bank Loan Portfolio will follow the S&P/LSTA U.S. Leveraged Loan 100 Index through the use of a representative sampling strategy. The benchmark tracks the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments.
The rules-based index, which has 100 loans, is a subset of a larger benchmark, the S&P/LSTA Leveraged Loan Index, which comprises 1,100 loan facilities. Leveraged loans are rated below investment-grade quality or are unrated. Their speculative nature usually means they are often more volatile than higher-quality loans and are less liquid in the secondary market.
While the fund will generally secure collateral, investors are advised to keep in mind that investing in below-grade-investment-grade bank loans involves credit risk as well as interest rate fluctuations risk, the company said in its filing.
Some of the criteria required for a loan to be eligible for the mix include the loan having a minimum initial term of a year, being dollar-denominated and having a minimum initial spread of 125 basis points over Libor (the London interbank borrowing rate).
The index will be rebalanced semiannually.
PowerShares didn’t specify the proposed ETF’s ticker symbol or expense ratio in the filing, but did say the ETFs would be listed on Arca, the New York Stock Exchange’s electronic trading platform.