First Trust Advisors LP, the Wheaton, Illinois-based money manager, plans to start an actively managed senior loan exchange-traded fund amid record demand for floating-rate debt.
The First Trust Senior Loan Fund will invest at least 80 percent of its assets in floating-rate loans made to businesses operating in North America, and the remaining may be allocated to other junior-debt obligations, equity securities and warrants, the firm said today said in a statement distributed by Business Wire. The fund, the firm’s 76th ETF, will be listed under the FTSL ticker beginning May 2 and will seek to outperform the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index and the Markit iBoxx USD Leveraged Loan Index, First Trust said.
The First Trust fund will be the second actively managed loan ETF and only the fourth such product to primarily invest in loans made to speculative-grade companies. The move comes as inflows into funds that purchase the floating-rate debt have climbed to a record $20.8 billion, according to Bank of America Corp.
“We haven’t even seen interest rates rise and there’s been fairly robust demand for this debt,” said Bill Housey, a money manager at First Trust, which manages about $1 billion in bank loan and junk bond assets. “We are in the early innings of the demand cycle for this asset class and it will only grow from here.”
Loans are better protected during a period of rising rates since they are generally pegged to floating-rate benchmarks. The value of a fixed-rate security diminishes with an increase in rates.
Earlier this week, Invesco Ltd.’s PowerShares Senior Loan fund, started two years ago as the first loan ETF, reported the creation of 7.4 million shares, the most in a single day, valued at about $185 million, according to data compiled by Bloomberg.
Blackstone Group LP, the world’s largest private-equity firm, combined with State Street Corp. to form the first actively managed loan ETF. The SPDR Blackstone/ GSO Senior Loan ETF began trading on April 4.
The First Trust ETF will focus on B and BB rated credits, Housey said, and will look to outperform the 5 percent to 6 percent returns he expects from the broader market for floating-rate debt.
ETFs allow individual investors to express their opinion on an asset class without directly owning a particular security. Unlike mutual funds, whose shares are priced once daily, ETFs are listed on exchanges and are bought and sold like stocks.
While a passive ETF looks to pick securities that mirror the returns of a benchmark index, an actively managed ETF tries to generate gains that exceed the measure, allowing the fund to extract higher fees from investors.
The price of loans rose 0.01 cent yesterday to 98.5 cents on the dollar on the S&P/LSTA U.S. Leveraged Loan 100 Index, the most since July 2007. Leveraged loans are a type of junk-grade debt rated less than Baa3 by Moody’s Investors Service and below BBB- by S&P.