BKLN - SRLN: An Interesting Income Play Few Talk About

2023-11-17 12:11:51 ET

Summary

• SPDR Blackstone Senior Loan ETF provides exposure to senior loans and aims to generate current income while preserving capital.
• Senior loans are high-yield debt obligations backed by the borrower's assets, offering protection against inflation but carrying higher credit risk.
• The SRLN ETF's portfolio is diversified across various sectors, with no AAA rated holdings, and has shown competitive performance compared to similar ETFs.

There's a lot more to income investing than just individual bond investing or allocating to well-known bond exchange-traded funds, or ETFs. One of the lesser talked about income plays is the SPDR Blackstone Senior Loan ETF (SRLN). SRLN is unique in that it provides investment exposure to senior loans. It aims to generate current income in line with capital preservation. To achieve this, the fund's primary objective is to outperform the Markit iBoxx USD Liquid Leveraged Loan Index and the Morningstar LSTA U.S. Leveraged Loan 100 Index.

Senior loans, also known as senior bank loans, are debt financing obligations issued by a bank to a company, typically with below investment-grade credit ratings. The loans are then repackaged and sold to investors. They typically offer high yields. Senior loans are senior secured, meaning they are backed by the borrower's assets and take precedence over other debt in the event of bankruptcy. These loans usually have floating interest rates, which can provide protection against inflation. However, they carry a higher credit risk and may be more volatile than more traditional investment assets.

A Look Under The Hood

SRLN's portfolio is diversified across a variety of sectors and industries.

No AAA rated holdings here. The majority are in the B range. Some credit risk, but certainly not as risky as more junk debt types of funds.

Top holdings include:

1. ATHENAHEALTH GROUP INC : This company is a leading provider of network-enabled services and mobile applications for medical groups and health systems.
2. PERATON CORP : A company known for providing innovative solutions for national security.
3. MEDLINE BORROWER LP AKA MEDLINE INDUSTRIES : A manufacturer and distributor of medical supplies.
4. CLOUD SOFTWARE GROUP INC AKA BALBOA/CITRIX : A prominent player in the software sector, known for its cloud-based offerings.
5. MCAFEE CORP : A globally recognized cybersecurity company.

The largest allocation is to Medline at just a 1.91% weighting. This is a well-diversified fund in that there is no holding that makes up a large allocation.

And since this is an income play, it's worth noting that the fund has done quite well on a total return basis and now has a 7.5% dividend yield according to YCharts.

SRLN vs. Similar ETFs

When compared to other similar ETFs, such as the Invesco Senior Loan ETF ( BKLN ) and the First Trust Senior Loan Fund ( FTSL ), SRLN has shown competitive performance.

Pros and Cons of Investing in SRLN

Like any investment, the SRLN comes with its own set of advantages and drawbacks.

Pros

• Increased Income Opportunities: SRLN delivers an enticing yield, positioning it as a compelling investment for those prioritizing income generation.
• Reduced Sensitivity to Interest Rate Changes: The floating-rate nature of senior loans makes them less vulnerable to shifts in interest rates, offering a measure of safeguard against increasing rates.
• Portfolio Diversification: Allocating funds to SRLN can broaden an investor's portfolio, especially for those interested in gaining exposure to the credit market without the inherent interest rate sensitivity associated with conventional bonds.

Cons

• High Credit Risk : The fund primarily invests in non-investment grade securities, which inherently carry a higher risk of default.
• Expense Ratio : SRLN has a higher expense ratio (0.70%) compared to other ETFs, which can eat into the overall returns.
• Market Volatility : The value of the fund's investments can fluctuate due to changes in market conditions, presenting a risk to investors.

To Invest or Not to Invest?

Investing in SPDR Blackstone Senior Loan ETF offers an opportunity to earn attractive yields while providing some level of protection against rising interest rates. However, the fund's high credit risk and expense ratio may be off-putting for some investors. While SRLN does present a compelling investment case, it's also important to keep a close watch on credit markets. While this is more secure of an income play than junk debt, should a credit event (finally) take place, this will likely be vulnerable. Overall, it is a good fund to consider in an interesting part of the loan space.

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