In our previous article, we recommend investors increase portfolio allocations to investments poised to benefit in a rising rate environment. In this edition will evaluate bank loan ETFs using our evaluation framework described below.
Bank Loans are an ideal investment for higher interest rates. Most loans accrue interest at a spread over short-term rates based on indexes such as LIBOR or prime rate. When underlying base interest rates increase the investor's income will grow larger. As an added benefit most loans are senior secured, meaning investors are first in line for repayment should a company default.
The best way for individual investors to access the loan market is through a bank loan ETF. According to ETF database, there are four bank loan ETFs: Senior Loan Portfolio (BKLN), SPDR Blackstone GSO Senior Loan ETF (SRLN), Senior Loan Fund (FTSL), Pyxis/iBoxx Senior Loan ETF (SNLN). The funds distribute income through
The Federal Reserve, and more specifically Janet Yellen, put to rest any doubts about the direction of interest rates. US Treasury purchases are set to decline by another $10 Billion per month with further reductions sure to follow; indications that the Fed will follow a trajectory of short-term rates rising to 1% by the year end 2015.
The impetus of Fed stimulus is undoubtedly aiding a multi-year bull market. As the fed stimulus comes to an end, investors should position their portfolio for a rising rate environment.
Automatic Data Processing (ADP)
ADP is a payroll processing company with much of their income coming from the float from employers funds before being paid out. Back in 2008, with higher rates, ADP generated $700 million of net income. An amount that is half that level today. As interest rates rise, ADP is sure to see an earnings tailwind boosted by their float