Low interest rates, minimal defaults, and improving corporate fundamentals are among the factors luring investors to high-yield corporate debt this year. Senior loan funds have been big beneficiaries.
Senior loans, also known as bank loans or leveraged loans, are drawing substantial institutional flows this year. Bank loans usually feature floating rate components, making the asset class attractive for market participants seeking the alluring though hard-to-find combination of above-average income and rising rates protection.
It’s also an asset class ripe with opportunity for active managers. Sure, the widely followed S&P/LSTA U.S. Leveraged Loan 100 Index yields 3.21% and is essentially flat on the year, but active managers can capitalize on credit opportunities in this space that many index-based strategies aren’t nimble enough to meet. Bank loan ETF investors are embracing active funds in this category.
“Senior loan ETFs gathered $7.3 billion year-to-date through July 9, nearly doubling the investment style’s asset base to $16 billion,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note. “More than half of the senior loan ETF assets are actively managed, in contrast to the broader fixed-income universe that is heavily slanted toward index trackers.”
Three of the senior loan ETFs on the market today have north of $2 billion in assets under management, and two of those three are active funds.
“The potential benefits of active management include the ability to forecast credit default risk through bottom-up analysis as well as shift the credit exposure based on the macroeconomic environment,” notes Rosenbluth.
To the point of credit risk, Rosenbluth points out that the S&P/LSTA U.S. Leveraged Loan 100 Index allocates about 72% of its combined weight to bonds rated BBB and B while some active funds in this category devote 80% or more of their rosters to bank loans with B ratings. In this environment, some credit risk could be a plus for income-hungry investors.
“We have favorable CFRAETF star ratings on a number of actively managed senior loan ETFs,” said Rosenbluth.
Investors embracing active senior loan ETFs may be on to something. In the first half of the year, active bond managers across nearly all fixed income segments did a better job of beating their benchmarks than active equity managers did.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
