Oct. 6, 2013 4:50 p.m. ET
In anticipation of rising interest rates, many investors are turning to funds that hold debt with variable interest rates that adjust periodically to market conditions.
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One option among exchange-traded funds is First Trust Senior Loan FTSL 0.00% First Trust Senior Loan Fund ETF U.S.: Nasdaq $49.54 0.00 0.00% Oct. 30, 2013 3:59 pm Volume (Delayed 15m) : 48,244 P/E Ratio N/A Market Cap N/A Dividend Yield 3.75% Rev. per Employee N/A 10/06/13 Worried About Rising Rates? Co... More quote details and news » FTSL in 
Your Value Your Change Short position (ticker: FTSL). Like its peers, this actively managed ETF invests mainly in floating-rate loans made by banks to businesses with below-investment-grade credit ratings. The $69 million fund, which launched in May, is led by Bill Housey, a veteran institutional fund manager whose team oversees more than $1 billion in assets.
First Trust Senior Loan yielded 3.3% as of Sept. 30. The rates on the fund's loan holdings reset every three months on average.
Bonds with fixed interest rates—and the funds that invest in them—generally fall in price when rates rise. A bank-loan fund's price is less likely to be hit hard because of a rate adjustment. And while these loans to "junk" borrowers involve credit risk, they are considered senior secured debt, meaning they are first in line for payment if the company defaults.
However, corporate defaults are expected to "remain relatively low," Mr. Housey says, "which should provide a relatively attractive runway for floating-rate loans."
Mr. Housey likes health-care companies, which he says are relatively stable in a slow-growth economy. He also sees more growth ahead for domestic auto makers and leading entertainment companies with customers in the U.S. and abroad. He is less enthusiastic about consumer-oriented businesses such as restaurants, discount retailers and airlines.
First Trust Senior Loan charges annual expenses of 0.85%, more than most passive ETFs but slightly below the 0.9% expense ratio of another actively managed ETF in this area, the $525 million SPDR Blackstone/GSO Senior Loan. SRLN +0.08% SPDR Blackstone/GSO Senior Loan ETF U.S.: NYSE Arca $50.13 +0.04 +0.08% Oct. 30, 2013 3:59 pm Volume (Delayed 15m) : 80,042 P/E Ratio N/A Market Cap N/A Dividend Yield 2.93% Rev. per Employee N/A 10/06/13 Worried About Rising Rates? Co... More quote details and news » SRLN in Your Value Your Change Short position
Mr. Coleman is a Wall Street Journal columnist, based in San Francisco. Email him at murray.coleman@wsj.com.
