With worries a slowing economy could result in higher default rates, high yield bonds and leveraged loans were sold off, pushing yields and credit spreads higher. For the three months ending January 31, BKL lost nearly 2%, but managed to finish in the upper half of its peer group. This loss was even with the U.S. Federal Reserve finally moving rates higher in December. This was the worst performing fixed income ETF on the Focus List, and was the only one to finish in negative territory.
Again, I reiterate that this recent selloff highlights that these types of investments are NOT suitable as a core holding in your portfolio, despite what fund companies will have you believe. Instead, they are really only suited to higher risk investors who are comfortable taking on additional risk of loss over the short term, in return for the potential for reduced interest rate sensitivity.
As I look ahead, I still believe that this is the best choice in the category for those looking for an ETF that provides exposure to floating rate loans. That said, I am lukewarm at best on the asset class in the near to even medium term. Many of the loans held have interest rate floors in place that remain above the current short term yields, meaning we will need to see rates move even higher before the true value of these funds is realized. Until then, because the overwhelming majority of bank loans are unrated, investors will instead be focusing on the risk of default, which I expect will result in higher than average levels of volatility. If higher volatility is a concern, you will likely want to avoid floating rate notes and bank loan focused investments for the next little while. Longer term, particularly when we start to see some meaningful movement higher on interest rates, these types of investments can play a role in a well-diversified portfolio.