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Tuesday, February 8, 2011

What are Bank Loan Funds?

Many DIY investors today feel their biggest challenge is in the fixed income arena. Yields are historically low and likely to rise and, in the process, push bond prices lower. One part of the fixed income market worth considering, for at least a small portion of funds, is the bank loan funds sector. Bank loan fund offerings carry credit risk, and some allow withdrawals only on a quarterly basis - you have to manage your withdrawals ahead of time. The big positive is that, because they are comprised of floating rate issues, they will adjust upwards in a rising interest rate environment and thereby avoid the interest rate risk problem.

Source: Kiplingers March 2011 p. 29
This table was derived from Kiplinger's "The Biggest and Best Bond Funds and ETFs" article in the March 2011 issue. #  in the "expense ratio" column indicates a sales charge. I would tend to prefer FFRHX off of this list, despite the lower 12-month return, because of the lower expense ratio; and I don't like to pay sales charges. Remember, higher return typically means higher risk.

On the risk front, it is worth noting that in 2008 the fund was down more than 16%. You can see this by going to Morningstar and typing in the symbol and then clicking the "performance" tab. Also, the fund has a redemption fee if redeemed within 60 days, and there is a minimum investment. I would limit investment exposure in this particular asset class to 5% of total investable assets.

Disclosure:  This information is for educational purposes only. Investors should do their own research or consult with an advisor before making investment decisions.


  1. I hate funds with redemption and 12b-1 fees! :)

    But, interest rates are rising so some exposure may not be bad at this time.

  2. It feels awesome to read such informative and unique articles on your websites.
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