Pyxis, the Dallas-based money manager that spun off from Highland Funds Asset Management at the beginning of the year, is making its first foray into the ETF space with its Pyxis/iBoxx Senior Loan ETF (SNLN).
Highland already has a lineup of 20 open-ended mutual funds and traditional closed-end funds while Pyxis aims to serve up access to senior loans through an ETF strategy that will attract investors looking for income without taking on too much risk in this time of low interest rates.
The fund will replicate the Markit iBoxx USD Liquid Leveraged Loan Index and will invest primarily in below investment-grade senior loan portfolios of domestic and foreign corporations and partnerships. To improve liquidity, the fund seeks exposure in the 100 most liquid loans.
SNLN will compete against the PowerShares Senior Loan ETF (BKLN), the only other ETF focused on the senior loan universe. For people unfamiliar with this type of fixed-income instruments, senior loans, also known as leveraged loans, have risk profiles similar to below investment-grade securities and provide debt capital to a company.
They are generally issued by banks against collaterals and are syndicated by a group of banks or institutional investors, making them safer than other unsecured ‘junk’ bonds. Also, since these debt securities are typically issued during leveraged buyouts (LBO) or other debt-assisted merger and acquisition activities, they are senior to other forms of debts, meaning they have better recovery rate in the event of a default.
The interest rates on these notes is set at a predetermined level over LIBOR, making them less vulnerable to interest rate risks compared to other fixed-income instruments since LIBOR rates are adjusted periodically.
That also lowers their correlation with other standard fixed-income securities in the market. Given its low credit quality and relatively illiquid nature, this sub-asset class has witnessed decent returns.
SNLN’s lone competitor, the PowerShares Senior Loan ETF (BKLN), has a 30-day SEC payout of 4.4 percent, despite having an average portfolio maturity of less than five years. Due to its solid broad bond benchmark-beating performance, BKLN has accumulated $1.2 billion in assets in less than 18 moths.
Pyxis/iBoxx Senior Loan ETF (SNLN) has an annual expense ratio of 55 basis points compared to BKLN’s 76 basis points.
While “low credit quality and an illiquid nature” may work OK in a rip-roaring economy, I have my doubts whether these types of products will fare well not only during a global slowdown but also a worsening debt crisis and eventual blow up or dissolution of the Eurozone.
Disclosure: No holdings