How To Maximize Your Wealth Immediately
If you’ve followed my Wealth Watch articles for a while, you know that I’m a huge advocate of getting creative with your income investing options.
Traditional fixed-income strategies that invest in long-term corporate and government bonds are likely to be very hazardous to your wealth with interest rates and inflation on the rise.
So what’s a good “creative” alternative? Consider leveraged loans.
Leveraged loans are made by big banks to corporate borrowers mainly as short- or intermediate-term financing for business operations or to close an acquisition. They also are made in order to refinance higher-interest-rate debt.
This has become a very big business. In fact, leveraged loans are now a $1 trillion marketplace, meaning the asset class has gone prime-time.
There are several advantages to leveraged loans over traditional longer-term bonds.
First, as a lender, or owner of leveraged loan securities, you’re higher in the corporate pecking order. If a business struggles and needs to restructure its debts, leveraged loans are secured by the firm’s assets.
That means you’re in line to get repaid ahead of most other creditors, including bondholders and way ahead of stockholders.
Even better, leveraged loans typically have floating interest rates, which means your yield rises along with Federal Reserve rate hikes. This is critically important in today’s rising-rate environment, because your interest rate risk is practically zero. Leveraged loan rates adjust higher at regular intervals along with the market.
Of course there’s a catch…
One of the most widely followed benchmarks of the leveraged loan market is the S&P/Loan Syndications & Trading Association (LSTA) Index.
As you can see above, the index has soared 50% in less than 10 years and includes a higher interest rate than most other fixed-income investments.
But there’s a downside too. The index dropped nearly 40% during the 2008 financial crisis, along with most other securities at that time.
As they say, no risk, no reward.
Bottom line: Leveraged loans have gone prime-time as a viable alternative to fixed-income investment. Corporate default rates are near record lows today, meaning less risk. Meanwhile, interest rates are rising, making floating-rate bank loans an attractive investment option today.
There are several closed-end funds that invest in the sector, but the easiest and most transparent way to get involved is with the PowerShares Senior Loan Portfolio ETF (BKLN).
BKLN tracks the S&P/LSTA Index. Plus, BKLN offers a 4.2% current yield, which resets higher every 20 days on average as interest rates continue to rise.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch