Lever the Leverage: Why to Bet on ‘BKLN’ for Income
Low interest rates push advisors and investors to seek income generating assets beyond the safest of bonds. The Invesco Senior Loan ETF (NYSEArca: BKLN) is a notable option.
BKLN targets the S & P / LSTA US Leveraged Loan 100 Index. This index “is designed to reflect the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments”. according to Invesco.
Due to their variable interest rate components, leveraged loans usually attract investors who want to generate income in a rising interest rate environment. However, central banks and agencies such as the International Monetary Fund warn of deteriorating credit quality – bank loans are common for companies with high leverage and are classified as speculative.
“Income investors have returned to this sector in search of high returns, as bonds offer little return but significant risk. Loan mutual funds saw their largest three-week inflows since 2017 totaling around $ 2.5 billion, according to a Jan. 29 Bank of America Research note “, reports Randall Forsyth for Barrons.
Previous BKLN for bank credit exposure
Because interest rates are typically adjusted quarterly, senior loans are typically low in duration – a measure of a bond fund’s sensitivity to changes in interest rates. The variable interest component also offers investors an alternative method of generating returns while at the same time reducing the interest rate risk. As a result, in an environment of rising interest rates, bank lending is seen as an attractive replacement for traditional corporate bonds.
In other words, some investors may not feel compelled to avoid interest rate risk when interest rates are falling. However, there are still reasons to consider BKLN even as prices go down.
“Loans take precedence over bonds in the company’s capital structure and are therefore paid out first. Most loans also have floating rates, which are usually tied to a short-term benchmark such as the 90-day London Interbank Offered Rate or Libor, ”so Barrons.
Senior loans are typically used for corporate recapitalizations, acquisitions, leveraged buyouts, and refinancing. The BKLN loan portfolio includes the purchase of loans from banks or other financial institutions through assignment or participation.
Additionally, BKLN may acquire a direct interest in a senior loan from the agent or another lender through an assignment or an indirect interest in the loan by participating in a portion of the loan from another lender. The BKLN sells the loans within the portfolio by way of an assignment, but can also sell holdings in the loans in order to finance redemption requests.
The inherent risks associated with senior loans are similar to those of junk bonds, but take priority in the event of the borrower’s default. In a liquidation scenario, if the company is forced to sell its assets, the senior loan is repaid first. In addition, senior loans are asset-backed but junk bonds are not, making them a more attractive investment option when building a loan portfolio.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and cannot actually occur. The information on this website should not be used or construed as an offer to sell, solicitation to buy, or recommendation of any product.