By Rick Harper
The demand for high income amid concerns about rising rates has generated significant interest in exchange-traded funds offering exposure to senior loans. Senior loans, also commonly known as bank loans or leveraged loans, typically pay interest rates based on a spread above a short-term interest rate such as the London Interbank Offered Rate (LIBOR). Should rates rise, investor income payments should increase along with LIBOR. Since these loans are made to issuers of lower credit quality, senior loans provide high levels of income potential.
However, risks may be increasing in the leveraged loan market. After a period of 95 straight weeks of inflows totaling $66.3 billion in assets, these strategies have recently seen the largest amount of outflows in nearly three years (-$1.2 billion). At the same time, supply is continuing to increase at its fastest pace since 2007. In 2013, underwriting and syndication of loans topped