PowerShares Unveils Senior Loan ETF
March 03, 2011
Invesco PowerShares, the Wheaton, Ill.-based exchange-traded fund firm best known for its Nasdaq 100 ETF, today launched the market’s first senior loan ETF that will hold below-investment-grade, floating-rate loans the company hopes will catch on in the current environment.
The PowerShares Senior Loan Portfolio (NYSEArca: BKLN), which comes with a price tag of 0.83 percent that includes acquired fund fees, is a floating-rate income portfolio that invests primarily in senior loans, or what the company qualifies as leveraged, bank or floating-rate loans.
Because the loans have very low correlation to other fixed-income instruments, the strategy could help mitigate volatility associated with rising interest rates, Greg Stoeckle, head of Senior Secured Bank Loans at Invesco, told IndexUniverse. Unlike junk bonds, senior loans are fully secured by assets of the issuer, in a way that bonds are not, he said.
“Another key difference is that these loans are issued with a Libor [London interbank offered rate] component, so they have no interest rate risk and they get a credit spread on top of that,” Stoeckle said. “BKLN could be part of an investor’s yield-bearing credit allocation, with other short-duration instruments.”
BKLN opens the way for investors to potentially capitalize on strong credit-market performance of the past few years, and on solid growth in corporate earnings, Stoeckle added. “This is the perfect fundamental backdrop for this product,” he said.
“There’s been a lot of intrigue around this ETF,” managing director of global ETFs at Invesco PowerShares Ben Fulton added. “That happens when you unlock a new area in the ETF market. It’s been a long time since we’ve seen this much interest in an ETF.”
BKLN will track through representative sampling the S&P/LSTA U.S. Leveraged Loan 100 Index. The benchmark measures 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 more than 1,000 loans, according to the company.
Leveraged loans are rated below-investment-grade quality or are unrated. Although leveraged loans are speculative in nature, the noninvestment grade end of the loan market often has higher liquidity in the secondary market than investment grade loans, Stoeckle said.
Some of the criteria required for a loan to be eligible for the mix include the obligation having a minimum initial term of a year, being dollar-denominated and having a minimum initial spread of 125 basis points over Libor.
BKLN may also allocate part of the portfolio to closed-end funds that invest in senior loans and in junk bonds. While the portfolio is global in scope, all loans must be dollar-denominated.
The index is rebalanced semiannually, and reviewed for deletions on a weekly basis.
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