The rise of bank loan ETFs driven by yield-seeking investors is having an impact on the underlying market, according to a report Monday.
ETFs “might be a small part of the market, but they can have an outsized impact on market prices relative to their size,” Eric Gross, a credit strategist at Barclays, told Bloomberg News. “Investors and traders need to be cognizant of what the ETFs are doing because they can affect pricing, sentiment, and flows.”
PowerShares Senior Loan Portfolio (NYSEArca: BKLN), Highland/iBoxx Senior Loan (NYSEArca: SNLN), First Trust Senior Loan Fund (NasdaqGM: FTSL) and SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) are the ETFs that invest in senior loans. [Senior Loan ETFs: ‘Steady Returns and Higher Yields’]
BKLN is the largest fund in the group with assets of about $5.2 billion. Trading in BKLN has increased more than 12 times this year, according to Bloomberg. SRLN, an actively managed ETF, has quickly amassed more than $480 billion since launching in April. [2013 Could be the Year of the Bank Loan ETF]
Investors have been drawn to bank loan ETFs for their decent yields and protection from rising interest rates, since they track floating-rate securities.
However, that growth as triggered concerns the ETFs are influencing the leveraged loan market as more retail investors participate.
“Mutual funds and ETFs now own about 20% of the U.S. leveraged-loan market, about the most ever, and may contribute to bigger price swings going forward,” Bloomberg reported.
Next page: ‘Retail investors filling the void’
Ownership of bank loans has changed in recent years after the financial crisis blew up many leveraged hedge funds. Retail investors are filling the void, said Morningstar ETF analyst Timothy Strauts in a recent article. [Bank Loan ETFs: Shelter from the Rising-Rate Storm]
“Bank-loan funds have received record inflows in 2013. Since the end of June, $33 billion has been invested in the category. The five largest monthly inflows on record occurred over the past five months. There is clearly tremendous investor interest in the sector,” Strauts wrote.
He thinks the broader ownership among retail investors is a positive development for the overall health of the bank loan market. “Under ‘new ownership’ small losses will be less likely to cause panicked selling in the retail market the way it did amongst hedge funds meeting margin calls,” Strauts added.
Other analysts aren’t so sure the influx of retail investors will lower volatility in the bank loan market.
“The interesting thing to note though is how the loan market has evolved post-crisis,” said Darin Schmalz, a director at Fitch, in the Bloomberg story. The growth in the proportion of the market owned by individual buyers “will have an impact if investors begin to take money out of the asset class, which will force retail funds and ETFs to sell,” Schmalz said.