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ETF Specialist

Is It Time for Floating-Rate Bank Loans?

Bank loans look more attractive than high-yield bonds at the moment.

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 PowerShares Senior Loan Portfolio (BKLN) is a satellite holding for investors who are comfortable with assuming greater credit risk (its portfolio securities' average credit rating is BB) and that may be looking for floating-rate bonds to protect against rising interest rates. Most investors' portfolios are dominated by fixed-rate bonds. The biggest risk that fixed-rate securities face is the potential for rising interest rates. An easy way to minimize this risk is to diversify a bond portfolio with floating-rate securities. While few expect rates to rise dramatically in the near term, it pays to be prepared. If you wait for rates to rise before protecting yourself, it may be too late when the time comes.

What Are Bank Loans?
Bank loans are denoted high-yield for the sole reason that the firms issuing them are highly leveraged. Companies with this kind of leverage profile can get there either intentionally (because of a leveraged buyout, leveraged acquisition, or recapitalization) or unintentionally (because of a deterioration of the underlying business of an erstwhile investment-grade firm). Either way, the risk from leverage is the same, even if the businesses may be moving in different directions. With increased leverage comes the increased probability of default and bankruptcy.

Timothy Strauts does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.