Bank Loan ETFs Continue to Thrive

December 4th at 12:52pm by Todd Shriber

Despite calls, many unfounded, for their demise, bank loan funds continue to thrive. Through the end of October, year-to-date inflows to these products were over $54.3 billlion.

Regarding exchange traded funds, there are four bank loan ETFs. Led by the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the quartet have combined 2013 inflows of over $5.4 billion. That is an arguably impressive total when considering that as these ETFs have risen in popularity, the chorus of critics singing warning signs has grown louder.

Year-to-date, BKLN is the top asset-gatherer among PowerShares ETFs and that is saying because PowerShares is the fourth-largest U.S. ETF issuer with an expansive lineup of funds.

The allure of bank loans and the ETFs that hold them includes high yields and low sensitivity to interest rate changes.  For example, BKLN has a 30-day SEC of almost 4.1%. The actively managed First Trust Senior Loan Fund (NasdaqGS: FTSL), which debuted in May and already has $121.1 million in assets, has a 30-day SEC yield of 3.24%. [More Competition in Hot Bank Loan Sector]

Still, some market observers have questioned the liquidity of the bank loan market.  Others have warned that the trading rate risk for higher credit risk is not worth it because bank loans would be vulnerable in the event of a U.S. recession.

“Yes, bank-loan funds are marked with more-than-average credit risk, because they invest in below-investment-grade corporate loans. They’re comparable in credit quality to junk-bond funds, and some advisers contend that they’re even riskier. But that’s debatable,” writes John Gerard Lewis for MarketWatch.

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