Guggenheim Plans Active Senior Loan ETF

by on May 11, 2011 | ETFs Mentioned:

Guggenheim has laid the groundwork to introduce an ETF that invests in adjustable rate debt known as senior loans, setting the stage to introduce a product competing directly with a recent addition to the lineup of Chicagoland neighbor PowerShares. In a recent SEC filing Guggenheim detailed the Enhanced Adjustable Rate Senior Loan ETF, which would seek to outperform the Credit Suisse Leveraged Loan Index.

The proposed ETF would invest in adjustable rate senior secured loans, adjustable rate revolvers and senior secured bonds, as well as other short duration securities including adjustable rate unsecured loans, secured and unsecured subordinated bonds, short-duration corporate bonds, “busted” convertible securities, adjustable rate asset-backed securities, and collateralized loan obligations.

Senior loans generally pay interest based on a spread relative to a reference rate, often LIBOR over periods ranging from one-month to one-year. Senior loans, also known as bank loans or leveraged loans, generally refer to debt issued to corporations with an S&P credit rating of “BB” or lower. According to the filing, the proposed fund would not invest in issues in default [see all the ETFs in the High Yield Bonds ETFdb Category].

BKLN Highlights Interest

Senior debt is potentially appealing to investors seeking to generate current yield by taking on credit risk but unwilling to accept much interest rate risk–perhaps because of a view that rates will begin heading higher in the near future. Generally, the longer the duration of debt, the greater the sensitivity to changes in interest rates. Because interest payments made by issuers of senior loans change with fluctuations in the reference interest rate, the effective duration of these securities is often close to zero. That makes them attractive options for fixed income exposure for those who believe that interest rates are headed higher, and may also give this asset class appeal to those worried about an uptick in inflation [see Bond ETFs That Steer Clear Of Interest Rate Risk].

PowerShares debuted its Senior Loan Portfolio (BKLN), which seeks to replicate the S&P/LSTA U.S. Leveraged Loan 100 Index, in early March. BKLN, which already has more than $120 million in assets, offers a yield to maturity of close to 5%. With a weighted average of only about 32 days to reset, BKLN exhibits minimal interest rate sensitivity.

No expenses were included in the filing. BKLN charges an expense ratio of 0.83%.

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Disclosure: No positions at time of writing, photo is courtesy of Daniel Schwen.