An Option Play on Higher Interest Rates

Focus: OPTIONS

Andrew Keene Image Andrew Keene President and CEO, AlphaShark Trading

Due to fears of rising interest rates, speculators have been running toward exchange-traded funds designed to have low sensitivity to interest rates, notes Andrew Keene on Minyanville.com.

PowerShares Exchange-Traded Fund Trust II (BKLN) closely follows the movements of the S&P/LSTA US Leveraged Loan 100 Index. In turn, the index is designed to reflect the largest facilities in the leveraged loan market.

Recently, investors have been increasingly skeptical of the ability of US capital markets to continue their seemingly never-ending climb. Many market participants seem to believe that the markets' strength is directly tied to the Fed. For this reason, speculators are more focused on any news regarding future monetary policy than they are on the market itself. This has led investors to adjust their ETF portfolios in order to try to hedge their risk if interest rates do go up.

Due to fears of rising interest rates, speculators have been running toward exchange-traded funds designed to have low sensitivity to interest rates. BKLN is one such fund. It invests in senior loans, which are basically high-yield bonds with floating interest rates. When bank loans have a floating rate, they typically reset every one to three months based on short-term interest rates.

Last week, BKLN saw an inflow of approximately $147.4 million, which is a 3.4% increase week over week in outstanding units, according to ETFChannel.com.

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