The article was published in the March 2016 issue of Morningstar ETFInvestor. Download a complimentary copy of Morningstar ETFInvestor by visiting the website.
Bond investors should expect no free lunches. Higher yields are almost always compensation for greater risk, whether that risk is apparent or not. The potential of rising interest rates is a meaningful risk that could create a headwind for bond investors. Investors could reduce their exposure to this risk by shifting assets to short-duration bonds. But conventional short-term bonds tend to offer lower yields than their longer duration counterparts. Substituting credit risk for interest-rate risk is a potential solution that may allow investors to earn higher returns. Senior loans (also called bank loans and leveraged loans) do just that.
Alex Bryan, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.