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Investing Specialists

Bank Loans Appealing but Far From a Cash Alternative

These funds are best used to augment--rather than supplant--high-quality fixed-income exposure.

Investors have demonstrated ample enthusiasm for the bank-loan category during the past year. More than $25 billion in new assets has flown into the category during this time, the fourth-largest take of any category in Morningstar's database. Those new inflows represent more than one fourth of the total assets in the category.

What's Not to Like?
Given the current fixed-income environment, you don't have to squint too hard to see what investors have found attractive about these funds. For starters, their robust yields are compelling, particularly given the anemic payouts from competing investments. The median bank-loan fund has an SEC yield of about 4%, nearly twice as high as the median intermediate-term bond fund's SEC yield.