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How to Get More Than 4%, While Protecting Against Principal Loss


Senior bank loan securities, which are available in an ETF, offer benefits that not all investors are aware of.

ETF Investment Option

The PowerShares Senior Loan Portfolio (NYSEARCA:BKLN) tracks the S&P/LSTA US Leveraged Loan 100 Index, which is designed to track the 100 largest bank loans. The focus on the largest loans will increase liquidity of the portfolio. Because the bank-loan market can become illiquid, the ETF has special liquidity provisions. Because of the nature of bank loans and the specialized trading required to transact loans, BKLN will take creations and redemptions in cash instead of the traditional in-kind method. Also, the fund may borrow through an existing credit line in response to adverse market conditions. If BKLN uses this provision, the fund will become leveraged similar to a closed-end fund. In the event of excess volatility in the market, the portfolio manager has the ability to choose between using the credit line and selling individual loans. This increased flexibility should improve overall liquidity of the ETF. BKLN currently pays a 30-day SEC yield of about 4.20%.

RevenueShares Is Adding an Emerging Market ETF

In many cases, investors have run out of patience with emerging markets. Many have been told to invest in these market for the long term, but emerging market ETFs have had disappointing performances relative to US stocks. More patience is required as developed countries' ETFs keep improving relative to emerging markets ETFs.

There are signs that later in 2013 and in 2014 investors will be rewarded for holding emerging markets. These markets are cheap on a valuation basis, and the longer their economies stay stable, instead of collapsing as many pundits are predicting, the better the chances this sector will snap back on the upside.

One ETF that should be considered is the soon-to-be-released emerging markets offering from RevenueShares. RevenueShares weights known equity indexes by revenues instead of the weights used by the original indexes, which are usually cap weighted. RevenueShares weights each company in the index by its trailing fourth-quarter revenue, and rebalances the index on a quarterly basis. The performance of the RevenueShares ETFs have been impressive, validating for RevenueShares their belief that top line revenues is the most important fundamental factor in determining a company's net worth.

RevenueShares' new ETF will replicate the Bank of New York Mellon Emerging Markets 50 ADR Index (INDEXDJX:BKTEM) and will use the companies listed in that index. The countries comprising the largest share of the index are Brazil, China, Mexico, Taiwan, South Korea, and India. The largest sector exposure is energy, financial services, communication services, technology, and basic materials. Of course, the countries, sectors, and other components in the Bank of New York index will be different in the RevenueShares ETF, since the underlying index will be weighted by the RevenueShares methodology instead of the Bank of New York index cap- weighting construction.

Editor's Note: Max Isaacman is the author of Blizzard of Money, Winning with ETF Strategies, Investing with Intelligent ETFs, How to Be an Index Investor, and The NASDAQ Investor.
Max Isaacman and/or customers own shares of BKLN.
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