Consider Senior Loan ETFs Amid Rising Rates

JThe Federal Reserve raised interest rates by 50 basis points last week to combat record inflation, with Fed Chairman Jerome H. Powell announcing that “inflation is far too high” and that the Federal Open Market Committee “moves quickly to bring it down.”

Powell added that additional interest rate hikes of up to 0.5 percentage points are “on the table” in the coming months. The recent rate increase is the largest since 2000 and the second of seven hikes scheduled for 2022.

However, investors had abandoned fixed income securities in favor of less rate-sensitive products even before the Fed made this decision. While investors have moved away from fixed income securities, many are still looking for income.

So, as the Fed prepares to hike rates even further this year, demand for floating rate ETFs remains high. Unlike ETFs that target fixed-rate bonds, funds focused on floating-rate bonds are less sensitive to rate increases because they pay a floating coupon rate based on prevailing short-term market rates in addition to a fixed gap.

Due to quarterly coupon reviews, the duration profile is historically and structurally low relative to the broader global bond index.

For investors looking to manage interest rate risk through an actively managed portfolio of floating rate loans, the Franklin Liberty Senior Loan ETF (FLBL) might be a good fit. According to the fund description on the ETF database, FLBL invests in leveraged loans, bank loans and variable rate loans, which are often granted to “junk” borrowers with credit ratings below investment grade. The fund may invest in loans from companies whose financial situation is uncertain, including companies involved in bankruptcy and restructuring proceedings.

“Senior loan ETFs offer a similar above-average level of income as high-yield corporate bond funds without the same sensitivity to rising interest rates,” said Todd Rosenbluth, chief investment officer. research at ETF Trends. “Demand for ETF lending gained traction with advisors as the Fed raised interest rates.”

FLBL has an expense ratio of 0.45%.

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