Generate Income With This New Actively Managed Senior Loan ETF

| May 3, 2013 | 0 Comments

senior-loan-etfGenerating income from an investment portfolio isn’t easy.  Today’s slow growth and low inflation are holding interest rates near record lows.

And given the recent statements from the Federal Reserve and European Central Bank, this situation is expected to continue for another year… at the very least.

It’s forcing investors to think outside of the box in their search for yield.

One ETF investors have flocked to in their search for yield is the PowerShares Senior Loan Portfolio (BKLN).  Investors have poured more than $2.2 billion into BKLN so far this year in order to get a piece of the 4.76% annual dividend yield. 

BKLN’s obviously an attractive ETF for investors in search of generating income today. 

Not surprisingly, it’s attracting competition from other ETF providers as well.  In fact, First Trust recently listed an actively managed senior loan ETF.   

According to the fund summary, First Trust Senior Loan ETF (FTSL) is an actively managed exchange-traded fund. The fund’s primary investment objective seeks to provide high current income by investing primarily in a diversified portfolio of first lien senior floating rate bank loans.

The fund’s secondary investment objective is to provide capital appreciation. Under normal market conditions, the fund will invest in at least 80% of its net assets in Senior Loans that are made predominantly to businesses operating in North America and may also invest up to 20% of its net assets in non-Senior Loan debt securities including high-yield bonds, warrants, and equity securities.

Here’s the thing…

Senior loans are generally made to below-investment grade companies.  So they carry a higher risk of default than investment grade bonds.  But in order to compensate for the increase in risk, they come with a higher interest rate. 

The higher interest rates companies are forced to pay on senior liens are what allow ETFs that invest in them to deliver higher rates of return that are so attractive to investors today. 

In my opinion, the higher risk nature of investing in senior liens makes it a natural fit for an actively managed ETF like FTSL.  As William Housey, CFA, Senior Vice President and Senior Portfolio Manager at First Trust puts it…

“An index-based senior loan ETF principally considers the market value of the debt issuance outstanding in its selection methodology, an actively managed ETF gives us the latitude to utilize our rigorous credit process in evaluating an individual company’s ability to repay its debt, which we believe is paramount to driving attractive risk-adjusted and absolute returns over the long term.”

FTSL looks like a great new ETF that will generate income in today’s low interest rate environment.  And the active management should give FTSL an edge over index based ETFs like BKLN.

Good Investing,

Corey Williams

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Category: Bond ETFs, Dividend ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets three times a week. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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