Download the Schwab app from iTunes®Get the AppClose

Bank Loan Funds: Why Now?

Despite the Federal Reserve’s recent rate hike, fixed income yields are still low by historical standards—a reality that has prompted many investors to turn to ever more esoteric investment vehicles in hopes of higher returns. One example: bank loans—a type of corporate debt issued by companies with poor credit ratings. They’re private transactions, so you don’t purchase bank loans directly but rather through a mutual fund or an exchange-traded fund.

The underlying loans have coupons that include a floating reference rate—often based on the three-month London Interbank Offered Rate (LIBOR)—plus a fixed spread to compensate for the risk. The floating rate means the overall yield rises along with short-term interest rates, while the spread typically boosts the yield above that of more traditional fixed income investments.

Most bank loans have a LIBOR “floor,” meaning the reference rate will never be set below that threshold. (Nearly all bank loans have a floor or 1% of less.) Once LIBOR exceeds that floor, the reference rate is free to float upward.

LIBOR is closely tied to the federal funds rate, so it tends to rise as the Fed raises rates. That was the case after the Fed’s rate hike late last year, when the three-month LIBOR finally surpassed the 1% mark—resulting in higher coupons for nearly all bank loans.

The bottom line: Bank loan funds are not suitable for everyone. But if you’re interested in an investment with a high relative yield that could benefit from future rate hikes, they might be worth considering.

What you can do next

The Endowment Effect: Do You Overvalue Your Investments?
5 Tips for Newlyweds

Important disclosures

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Lower-rated securities are subject to greater credit risk, default risk and liquidity risk.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.