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By Christine Benz | 08-21-2013 02:00 PM

Our Active and Passive Picks for Bank-Loan Funds

With investor interest in bank loans at elevated levels, Morningstar's Sarah Bush and Tim Strauts offer their highest-conviction mutual fund and ETF picks for those seeking exposure to this asset class.

Christine Benz: Hi I'm Christine Benz for Morningstar.com. Bank-loan funds have been generating a lot of interest lately. I sat down with Tim Strauts and Sarah Bush, two of Morningstar's bank-loan fund specialists, to discuss some of Morningstar's favorite picks within the category as well as some fund types to avoid.

There has been so much interest in the bank-loan category. I'd like to talk to you two about some of Morningstar's highest-conviction bank-loan investments, both mutual funds and exchange-traded funds.

Sarah, let's start with you in terms of the open-end bank-loan funds that we look at, what do you rate as our highest-conviction pick in that space?

Sarah Bush: We have a Gold Morningstar Analyst Rating on Eaton Vance Floating Rate, and this is a very experienced management team. It's been in the market for a long time, backed by really serious, good analysts. This is kind of a market-rate-like fund. This particular one doesn't carry any leverage, which some of the other Eaton Vance products do. We just really like the research backing it, and we feel like they're taking a careful and cautious approach to the risks in the market.

Benz: Eaton Vance has been a big player in this space for a long time. They have several different funds, but this is your top pick.

Bush: Yes. Eaton Vance Floating Rate, which is their pure, or nonleveraged, bank-loan fund.

Benz: Tim, let's talk about the exchange-traded fund space. There's been an explosion of interest there, as well. In terms of Morningstar's favorite pick in the bank-loan ETF space, what is the top-conviction fund?

Tim Strauts: It will be PowerShares' Senior Loan, ticker BKLN, and this is an index portfolio. Typically most bank-loan funds are very active in nature, but this fund owns an index of the 100 largest bank loans in the market. You get a very diverse collection of loans and typically speaking, the 100 largest are also going to be the 100 most liquid. You get a more liquid, not necessarily high-quality, but big size as far as bank loans.

The fee in the fund is pretty low because it's an index fund. It's 65 basis points, which may sound high if you're in most ETFs, but compared with most of the bank-loan funds, it's pretty cheap. And it has also grown to about $5 billion in assets just in the last two years.

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