Dabbling in Debt with This ETF

As my readers know by now, I aim to live life to the fullest and sometimes that includes taking risks, which I have relayed in past issues of The Deep Woods, but there is a difference between calculated risk and unnecessary risk.

So, while the economy may be poised for a soft landing, given the recent string of positive economic reports in the United States, stronger-than-expected earnings growth and a surprisingly resilient job market, it doesn’t mean this possibility will come to fruition. With this in mind, I tend to be of the mindset that padding your portfolio with lower-risk ETFs may be a wise decision.

This is where the Franklin Senior Loan ETF (FLBL) comes into play. FLBL is a fund that aims to produce a high level of current income and preserve capital. Produce and preserve – two words that every investor should like.

The fund invests in U.S. dollar-denominated senior loans of both U.S. and non-U.S. companies. However, its exposure to non-U.S. issuers is capped at 25%.

The debt FLBL invests in is mostly floating rate and sub-investment grade, with a rating of B- or better. However, just like yours truly, this fund also takes certain calculated risks and up to 25% of its holdings may have a lower credit rating. Here’s why I am calling this a calculated risk: investing in debt with a lower credit rating can generate higher yields than debt with higher ratings.

FLBL invests in debt with floating rates, which can virtually eliminate the interest rate risk of a portfolio. The downside here is that the credit risk can increase if the issuers are struggling to make larger payments when rates rise.

Formed in 2018, FLBL has assets under management of $226.33 million and net assets of $227.54 million. Now, while those numbers are not in the billions of dollars — it has a tantalizing dividend yield of 7.80%. Moreover, when looking at the chart below, FLBL is trading at $24.22, the highest end of its 52-week range. As of this writing, the fund is trading at $24.06. In addition to that, FLBL’s 50- and 200-day moving averages are steadily climbing and have been doing so during the last few months of 2022.

Source: Stockcharts.com

In terms of holdings, Financial Services makes up 71.42% of the fund’s weighting. And 92.53% of its composition is comprised of bonds.

Overall, dabbling in debt sounds far riskier than it may prove to be, as the sole purpose of the fund is to produce and preserve income – and that is what our goal is while we wait to see where the economy goes.

Further, not only does the fund have an incredible dividend yield, but it’s also trading at its peak and is proving its stability through its moving averages. So, for investors who may be intrigued by a little calculated risk, Franklin Senior Loan ETF seems worth considering.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.