In a move targeted at investors looking for high-yield investment options, State Street (NYSE:STT) tied up with Blackstone (NYSE:BX) to launch the first-of-its-kind actively managed senior loan exchange-traded fund (ETF) this Thursday.  The ETF, which is trading on the NYSE Arca under the symbol SRLN, aims at outperforming the Markit iBoxx USD Liquid Leveraged Loan Index and the S&P/LSTA U.S. Leveraged Loan 100 Index, according to the company which boasts of being the second largest provider of ETFs in the world after BlackRock (NYSE:BLK).
The low interest rate environment has led to increased demand for high-yield products from investors over the recent months, and the new ETF comes as an attractive option as it combines State Street’s investment management expertise with that of Blackstone’s global credit business, GSO Capital Partners.
We maintain our price estimate for State Street’s stock at $61, which is less than 10% above the current market price.
As can be readily seen from the chart above, State Street’s ETF and other alternative investment business is the most valuable division among its asset management offerings – the others being fixed-income investment, equity investment and money market investment. The phenomenal rise in the popularity of ETFs over the recent years is largely responsible for the importance of the business to State Street. And the demand for ETF products is only increasing.
The new actively managed senior loan ETF (SRLN) bets on higher returns from an increase in interest rates over the time to come. The Fed has kept interest rates at record low levels since the economic downturn of 2008, and it is just a matter of time before the rates are hiked. In the event of a rate hike, the floating nature of loan interest rates would mean more return for investors in this ETF.
At the same time, a loan-based ETF comes at a lower risk to investors than debt-based ETFs, as the pecking order of repayment in the event an underlying company goes bankrupt is first the lenders, then the debt holders and finally the equity holders. Moreover, investments in this ETF would cost investors 90 basis points (0.9%), which is lower than the 110-178 basis point range (1.1% – 1.78%) demanded by mutual funds that buy senior notes.
While it is yet to be seen how successful the ETF is in drawing investor money, State Street could grow its ETF offerings rapidly in the future if the SRLN hits the right note with the investors.Notes:
- SSgA Partners with GSO / Blackstone to Bring First Actively Managed Senior Loan ETF to Market, State Street Press Releases, Apr 4 2013 [↩]