With interest rates stuck at all-time lows, and expected to remain there for some time, investors of all walks have been eager to beef up their portfolio's current income. Luckily, the ETF universe is vast and investors have handfuls of options when it comes to generating yield; within the fixed-income market, one asset class in particular has managed to fly under the radar for most, although it warrants a closer look from anyone looking to tame overall volatility without sacrificing yield.

With ETFs opening up the doors to the global fixed-income market to mainstream investors, many have been quick to flock to well-known segments of the high-yield universe; junk bonds from U.S. and foreign issuers have garnered tremendous interest as this asset class has demonstrated the potential to deliver attractive distributions without taking on exorbitant risk. As such, it's not terribly surprising to see that the two biggest funds in the High Yield Bonds ETFdb Category focus on below investment-grade corporate debt.

The bigger of the two is the iShares iBoxx High Yield Corporate Bond Fund , which boasts over $17 billion in assets under management, while its competitor, the SPDR Barclays Capital High Yield Bond ETF trails behind with a portfolio totaling over $12 billion, showcasing the sheer interest in this lucrative space. The third most popular ETF in this category, however, is the only one of its kind to focus on a particularly attractive, and often overlooked, breed of debt notes: enter the PowerShares Senior Loan Portfolio .

Why You Need A Senior Bank Loan ETF

Bank loans have been flying under the radar for many fixed-income investors as ETFs have only recently opened up the doors to this asset class. Senior bank loans share a lot of common traits with regular junk bonds, however, a closer look at their differences reveals noteworthy insights.

First and foremost, senior bank loans are privately arranged debt instruments issued by a bank that provides capital to a company usually with a below investment-grade credit rating. Where these securities differ from junk bonds is in their underlying structure; although both of these high-yield corporate debt notes are rated below investment-grade, senior bank loans generally carry less risk than their traditional junk bond counterparts as they are secured by collateral in the event of a default. By nature, these loans are considered senior to all other claims against the borrower, which means that in the unlikely event of bankruptcy the senior bank loan is the first to be repaid ahead of other debt obligations .

In addition to boasting a safer risk profile, senior bank loans are also more favorably positioned over the long-term because they are floating rate instruments. Although interest rates are at historically low levels now, there is no doubt that the Fed will eventually raise rates to curb inflation. In the event of an interest rate hike, fixed-rate bonds of all sorts, including those found in HYG and JNK, would suffer far more than floating rate securities; the ability to keep pace with interest-rate changes effectively makes senior bank loans more stable than typical bond funds for buy-and-hold investors of the long-haul.

Inside BKLN's Portfolio

The PowerShares Senior Loan Portfolio offers exposure to an attractive corner of the junk bond space that has largely been overlooked. Because these debt notes arefloatingrate and secured by collateral, it's nosurprisethey offer a bit less in the way of yield compared to offerings like HYG; when comparing recent 30-day SEC yields, we see that BKLN boasts a 4.89% distribution, versus the more popular HYG which features a 5.48% distribution. The smaller dividend payout is, however, fairly compensated as BKLN's underlying holdings are effectively secured, floating rate, high-yield debt notes while virtually all other competitors in the space offer exposure to unsecured, fixed-rate, high-yield debt .

As the only ETF targeting this segment of the high-yield bond market, BKLN has managed to accumulate an impressive $1 billion in assets under management since launching fairly recently in early 2011. Digging deeper, we see that this fund features a well-balanced portfolio; BKLN is comprised of nearly 140 securities in total and it allocates less than one-fifth of total assets to its top ten holdings. From a cost perspective, BKLN is not the cheapest in the space, although its above-average 0.76% expense ratio is certainly well worth the few extra basis points considering that it's the only one of its kind .

Investors looking beef up their portfolio's yield while simultaneously diversifying their fixedincomecomponent ought to take a closer look at the PowerShares BKLN ETF as it stands to offer a truly compelling strategy that many stand to benefit from.

Follow me on Twitter@SBojinov

Disclosure: No positions at time of writing.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  5. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  6. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  7. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  8. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  9. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  10. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
Trading Center