BKLN Invesco Senior Loan ETF

Pyxis, a Dallas-based money manager that already has a lineup of mutual funds, is making its first foray into the ETF world with the Pyxis/iBoxx Senior Loan ETF (SNLN). This new product was initially supposed to launch in late October but the devastating ‘superstorm’ Sandy delayed the launch for the firm.

Now that the storm has passed, Pyxis has released its new SNLN on to the market, offering up a new choice for investors seeking exposure in the senior loan world. Still, with the Sandy related delays and some entrenched competition, the fund could have some trouble building up some assets although the product could be an interesting alternative to what is already on the market (see HYEM: The Best Choice in Junk Bond ETFs?).

That is because this new fund looks to charge investors a relatively low 55 basis points a year in fees, beating out the competition on this front. The product will also be following a different benchmark, the Markit iBoxx Liquid Leveraged Loan Index, so exposure for this fund looks to have a focus on liquidity, only holding the 100 most liquid loans.

This will likely result in some interesting competition against the PowerShares Senior Loan ETF (BKLN) the only other ETF to focus on senior loan universe. This product charges investors 76 basis points a year in fees, but has seen incredible interest, amassing over $1.2 billion and seeing volume in excess of half a million shares a day (read Should You Buy The Senior Loan ETF?).

Clearly BKLN has found quite the niche among investors, as the product is basically 18 months old, suggesting a pretty rapid buildup of assets for the fund. Yet due to the higher expense ratio and more spread out nature, the new SNLN could find a way to make its way into the market and steal a considerable amount of assets in this market segment.

Senior/ Leveraged Loan ETFs in focus

For those who are unfamiliar with the asset type, senior loans, also known as leveraged loans, are private debt instruments that provide capital to a company. Usually, these go to below-investment grade firms, and are issued by a bank and syndicated by a group of banks or institutional investors.

According to PowerShares, these loans are typically issued along with leveraged buyouts or other M&A activity, while the securities are (unsurprisingly) senior to other forms of debt or equity. This provides investors with some protection should there be a credit event, especially if the loans are secured by property, equipment, or other company items (read Three Excellent Dividend ETFs for Safety and Income).

Investors should also note that the rates for these notes float at a pre determined level over LIBOR, so there are minimal interest rate risks involved. Still, due to the lower credit quality and the relatively illiquid nature, the segment can be a decent yielder, as BKLN currently has a 30-Day SEC payout of 4.4%, despite an average years to maturity of less than five years.

The space has already proven to be a solid, and overlooked, segment for yield without taking on too much interest rate risk, or really credit risk either (thanks to the secured nature of these loans). Due to this, BKLN has been a solid performer, crushing broad bond benchmarks in the YTD and trailing one year time frame, and accumulating more than $1 billion in AUM along the way (read The ETF Winners and Losers of October).

Pyxis must have seen this incredible success, and the relatively low competition levels in the market, and decided to jump in as well. SNLN acts as a nice complement to the rest of the firm’s mutual fund lineup and it could be a good acid test for the Texas firm to see if it can find success in the ETF world as well. However, with the huge lead of BKLN, the competition will be tough to beat, although a much lower expense ratio for Pyxis’ fund certainly won’t hurt in their quest to develop a solid lineup of ETFs.

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