ETF loan demand ‘skyrockets’ as inflation concerns escalate



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Demand for exchange-traded funds investing in senior loans has exploded this year as investors seek respite from rising inflation.

A net $ 7.3 billion has been pumped into the sector so far this year, according to CFRA Research, nearly doubling its asset base to $ 16 billion.

The trend is linked to rising inflation and interest rate expectations in the United States and elsewhere, leading investors to favor floating rate loans over fixed rate bonds.

“It’s a long-term model,” said Ben Johnson, director of global ETF research at Morningstar. “It’s almost a barometer of investor expectations about the future direction of interest rates. When people are concerned about the possibility of increases, we see inflows. “

“The demand for senior loan ETFs exploded in 2021 as investors became more comfortable investing in fixed income ETFs,” added Todd Rosenbluth, head of ETF and investment research. mutual funds at CFRA. “They are less sensitive to interest rates than traditional credit.

Senior Loan ETFs invest in speculative grade securities, just like high yield funds, which have experienced cash outflows lately but offer higher returns to investors short of yield. However, funds hold securities that are higher in capital structure and exhibit lower volatility.

Although senior loan ETFs made up just 0.6% of global fixed income assets at the start of the year, they accounted for 6.5% of net inflows in 2021, according to figures from CFRA and ETFGI, a firm of advice.

The figures mark a sudden turnaround in fortunes. Bill Ahmuty, head of the bond group at State Street Global Advisors, said senior loan mutual funds and ETFs experienced net outflows of around $ 65 billion between late 2018 and late 2020.

“In August / September of last year, people’s views on rates started to change. We have started to see long term rates go up. That’s when we pivoted and started to see a comeback in the asset class, ”he said.

“They are looking to reduce the duration of their portfolio in order to migrate to variable rate products.”

Net inflows into senior loan mutual funds and ETFs have reached $ 20 billion so far this year, Ahmuty said, with ETFs accounting for a disproportionate share, a fact he attributed to strong performance. of the fund’s structure during the volatility spike triggered by Covid last year.

The SPDR Blackstone Senior Loan ETF (SRLN), the second largest ETF in its category, has seen its assets triple to $ 6.5 billion since the start of the year. Pension funds, wealth advisers, insurance companies and even loan managers have joined in, using the fund to gain quick exposure to the asset class.

According to SPDR, loans have historically experienced volatility of 5.8% per annum, compared to 7.7% for high yield bonds. Average yields are generally a bit lower for senior loans, at 3.7% versus 4.2% for high yield bonds.

However, they tend to invest in less liquid securities and charge higher fees. The $ 6.7 billion Invesco Senior Loan (BKLN) ETF, the largest fund in the industry, had an expense ratio of 0.67% and Blackstone’s SRLN of 0.7%.

A large portion of Senior Loan ETFs are actively managed, including SRLN, First Trust Senior Loan ETF (FTSL), and Franklin Liberty Senior Loan ETF (FLBL). Some 57 percent of senior loan ETF assets are active, Rosenbluth said, an unusually high figure given that 90 percent of the broad fixed-income ETF market and 96 percent of all assets ETFs are passively managed.

Loan illiquidity “lends itself better to discretionary management than indexation,” adding “it’s not that difficult for active managers to outperform the benchmark,” Johnson said .

Rosenbluth said active funds have higher exposure to lower quality triple C and single B credits than passive ETFs, helping them outperform by around 1.5 to 2 percentage points so far this year.

“Active managers take more credit risk in the senior lending space. Active managers do their own analysis of credit and default risk, ”he said.

Interested in ETFs?

Visit our ETF Hub for investor insights and insights, market updates and analysis, and easy-to-use tools to help you select the right ETFs.


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