Leveraged Loan Funds
Leveraged loan ETFs and mutual funds are sometimes recommended when there is a fear of rising interest rates. The interest rate on these loans is usually adjusted quarterly, thereby eliminating most, if not all, interest rate risk. However, the great majority of these loans have a junk rating, similar to high-yield corporate bonds.
The typical leveraged loan closed-end fund is leveraged by 26% (in an attempt to enhance yield). In 2008, the average closed-end fund lost ~ 46%, while the average open-end leveraged fund dropped 30%. During the third quarter of 2011, the typical closed-end leveraged loan fund lost 14%, while its open-end peer was down 4%.
