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ETF Specialist

This Fund's Juicy Yield Comes With Strings Attached

While it offers an attractive yield and limited interest-rate risk, this senior-loan ETF exposes investors to considerable credit and liquidity risk.

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 PowerShares Senior Loan ETF (BKLN) may offer an attractive yield and low interest-rate risk, but it takes significant credit and liquidity risk in doing so. It provides market-cap-weighted exposure to the 100 largest U.S. floating-rate senior loans, which are among the most liquid in the loan market. But this is still a very illiquid market where active management of liquidity and credit risk offers an advantage over this index strategy. So, despite its attempt to mitigate liquidity risk, the fund earns a Morningstar Analyst Rating of Neutral.

Senior loans have minimal price sensitivity to changing interest rates because their coupon payments float with prevailing interest rates and typically reset once a quarter. These adjustments make the duration of the loans close to zero, limiting the fund’s interest-rate risk.

Phillip Yoo does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.