They say there is an exchange traded fund (ETF) strategy for just about everything. Now investors can get exposure to the senior loan market as one method of protecting assets against rising interest rates. First Trust Advisors plans to launch a new actively managed ETF on May 2, 2013, called the First Trust Senior Loan Fund (NASDAQ: FTSL). The fund attempts to outperform the S&P/LSTA U.S. Leveraged Loan 100 Index and the Markit iBoxx USD Leveraged Loan Index.
The First Trust Senior Loan Fund will generate high current income and preserve capital by “investing primarily in a diversified portfolio of first-lien senior floating rate bank loans.”
The fund will hold at least 80% of its net assets in senior loans made to businesses operating in North America, under normal market conditions. Up to 20% of the ETF’s total assets may also be allocated to nonsenior loan debt securities, equity securities and warrants.
Senior loans generally are made to companies that are rated under investment-grade and generally are secured by collateral of the issuing company and positioned at the top of the capital structure. Senior loans also have interest rates that reset every 30 to 90 days at a floating rate, and that is where the protection against rising rates comes into play.
According to company, this marks the fourth actively managed ETF from First Trust and will bring the firm’s total number of ETFs to 76. The company’s press release said:
“While 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,” said William Housey, CFA, Senior Vice President and Senior Portfolio Manager at First Trust, who serves as one of the Fund’s Portfolio Managers. “Many fixed-income investors are looking for alternative sources of income that have historically performed well when interest rates have increased, such as senior loans, and we believe an actively managed ETF is an ideal way for investors to access a diversified portfolio of senior loans while gaining enhanced transparency and liquidity.”
We would note that investors currently have access to the PowerShares Senior Loan Port (NYSEMKT: BKLN), and this trades close to 2.7 million shares per day on average. There also are several senior floating rate and senior loan closed-end mutual funds as well: