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Senior Loan ETFs: The Strong Case for Active Management

Active managers of senior loans with long-term records of strong risk-adjusted returns have the potential to weather diverse market conditions, particularly in the later stages of the business cycle.

Key Points
  • We believe senior secured, floating-rate leveraged loans present a compelling opportunity for every ETF investor’s fixed income portfolio, regardless of the direction of interest rates. Trouble is, there isn’t much choice. Of the seven ETFs available, over half the assets are in the largest passively managed ETF, which has underperformed the Morningstar Bank Loan Category Average by over 50 bps annually since inception, placing it in the bottom quartile of the category.
  • While passive strategies strive to replicate indexes, regardless of market conditions, active managers have the ability (and agility) to adjust to credit, liquidity, and trading risks that come with leveraged loans at different parts of the business cycle.
  • With positive fundamentals for most industries, attractive relative valuations, and loan prices below par, now may be an opportune time to reconsider passive exposure and switch to an active manager with experience spotting relative value in what seem likely to be more challenging market conditions.

How Active Management Has Trumped Passive Bank Loans: Hypothetical Growth of $10,0001
Morningstar Bank Loan Category averages, actively managed vs. passive strategies, 3/3/2011-4/30/2019

Image_Senior Loan ETFs Active Management Chart

Past Performance is no guarantee of future results.
Source: Morningstar

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The commentary is the opinion of the Seix Investment Advisors. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.

The Morningstar Bank Loan category primarily invests in floating-rate loans instead of bonds. In exchange for their credit risk, these loans offer high interest payments that typically float above a common short-term benchmark such as the London Interbank Offered Rate, or LIBOR.

Bloomberg Barclays U.S. Corporate High Yield Bond Index is an unmanaged market value-weighted index that covers the universe of fixed rate, non-investment grade debt. Credit Suisse Leveraged Loan Index is a market-weighted index that tracks the investable universe of the U.S. dollar denominated leveraged loans. The index is calculated on a total return basis, is unmanaged and not available for direct investment. S&P 500® Index is a free-float market capitalization-weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. Russell 2000® Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and are not available for direct investment.

Average Coupon is the weighted average coupon (annual rate of interest on the bond’s face value that the issuer agrees to pay the holder until maturity) of all the securities in a fund. A Basis Point (bp) is equal to 0.01%. EBITDA refers to a company’s earnings before interest, taxes, depreciation, and amortization. It is calculated using a company’s net earnings, before interest expenses, taxes, depreciation, and amortization are subtracted, as a proxy for a company’s current operating profitability. Standard Deviation is a statistical measurement of dispersion about an average, which depicts how widely returns varied over a certain period of time. Tracking Error is the standard deviation of the difference between a fund return and its benchmark index return. It is a measure of is the volatility of a fund return’s in excess of its benchmark.
Exchange-Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Bank Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times. High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities. Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk. Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities. Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk. Market Price/NAV: At the time of purchase and/or sale, an investor’s shares may have a market price that is above or below the fund’s NAV, which may increase the investor’s risk of loss. Prospectus: For additional information on risks, please see the fund’s prospectus.

The Fund is an exchange-traded fund (“ETF”). The “net asset value” (NAV) of the Fund is determined at the close of each business day, and represents the dollar value of one share of the Fund; it is calculated by taking the total assets of the Fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV of the Fund is not necessarily the same as its intraday trading value. Fund investors should not expect to buy or sell shares at NAV because shares of ETFs such as the Fund are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Thus, shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns. NAV returns are calculated using the Fund’s daily 4:00 pm NAV, and include the reinvestment of all dividends and other distributions (reinvested at the Fund’s NAV on distribution ex-date). Market price returns are calculated using the 4:00 pm midpoint between the bid and offer, and include the reinvestment of all dividends and other distributions (reinvested at the 4:00 pm bid/offer midpoint on distribution ex-date). Market price returns do not represent the return you would receive if you traded at other times. The Fund is an actively managed exchange-traded fund and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index.

Please consider the Fund’s objectives, risks, charges, and expenses before investing. Contact us at 1.800.243.4361 or visit for a prospectus, which contains this and other information about the Fund. Read the prospectus carefully before investing.

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