First Trust Advisors, the Wheaton, Il-based money manager known for its niche strategies, has launched its fourth actively managed ETF. The First Trust Senior Loan ETF (FTSL) is expected to compete with the recently launched SPDR Blackstone/GSO Senior Loan ETF (SRLN). Debuted last month, SRLN is also actively managed and has already accumulated assets of more than $160 million.
FTSL seeks to generate high current income and preserve capital by investing mainly in a diversified portfolio of senior adjustable-rate bank loans from issuers with strong credit metrics. However, it may also invest in other debt instruments such as floating-rate loans of distressed companies, fixed-rate debt securities, money market instruments and floating rate bonds.
FTSL aims to outperform the S&P/LSTA US Leveraged Loan 100 Index – a market value weighted benchmark that tracks the performance of the largest segment of the US syndicated leveraged loan market; and the Markit iBoxx USD Leveraged Loan Index – an index comprising the 100 most liquid senior loans in the market. So, what are senior loans?
Senior loans are typically made by one or more banks or similar financial institutions to businesses and pays interest at a floating rate that are adjusted periodically. A senior loan is considered senior to all other unsecured claims and senior to all other secured claims, which positions them at the top of capital structure. This means that in the event of a bankruptcy, the senior loan, together with other first lien claims, is the first to be paid out over other unsecured claims and interests.
Consequently, senior loans have higher recovery rates than other below-investment-grade debts. Average recovery rate for senior loans between 1987 and 2012 was 80.6 percent, a research by Moody’s Analytics show, compared with 63.7 percent for senior secured bonds, 48.6 percent for senior unsecured bonds and 28.5 percent for subordinated bonds.
Additionally, senior loans reset every 30 to 90 days. This floating rate characteristic differentiates senior loans from high-yield bonds and other fixed-rate instruments since senior loans tend to generate higher incomes as short-term interest rates rise.
The fund adviser seeks to construct a portfolio of loans that is less volatile than the general loan market while maintaining appropriate liquidity and price transparency. The fund will invest at least 80 percent of net assets in senior loans made to companies operating in North America. Up to 20 percent may be invested to non-senior loan debt instruments, equities and warrants.
FTSL has an annual expense ratio of 0.85 percent.
Disclosure: No holdings
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