Investors are again embracing floating-rate debt and that could be a catalyst for the Invesco Senior Loan ETF (NYSEArca: BKLN).

BKLN targets the S&P/LSTA U.S. Leveraged Loan 100 Index. That index “is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments,” according to Invesco.

Data indicate that market participants are fast becoming reacquainted with leveraged loans.

“U.S. leveraged loan fund coffers grew by another $4 billion in March as retail and institutional investors continued to focus attention toward floating-rate debt,” according to S&P Global Market Intelligence. The most recent monthly inflow was the fifth straight for the asset class — AUM has surged by more than $20 billion since November 2020, according to Lipper — amid continued talk of inflation and rising Treasury yields, the latter of which reached 1.74% on March 31.”

BKLN YTD Performance

The Case for Bank Loans

Rising 10-year Treasury yields could be one reason investors are revisiting leveraged loans.

The floating-rate component also offers investors an alternative method of earning yields while mitigating interest-rate risk. As a result, bank loans are often seen as a desirable alternative to standard corporate bonds as rates are rising.

“The recent activity brings loan fund AUM to $109 billion, its highest since February 2020 and before the COVID-19 pandemic and subsequent lockdowns battered economies and shuttered the loan market,” adds S&P Global. “Of note last month, the hefty asset growth received no help from rising secondary prices, unlike in months previous when trading levels were rebounding from COVID-induced lows. Indeed, while overall loan assets grew by 3.84% in March, the market value change was negative 0.24% during the month, following 10 months of notable market value boosts to AUM.”

Retail investors are contributing to the recent swelling of bank loan assets.

“They continue to pour cash into the asset class. So far in 2021, loan mutual funds and exchange-traded funds have seen a net $13 billion inflow, according to Lipper weekly reporters. That is a dramatic turnaround from 2020, when loan funds saw some $19 billion in redemptions. Illustrating the profound investor shift toward floating-rate debt and away from fixed-rate assets, high-yield funds and ETFs so far in 2021 have seen redemptions totaling $8.7 billion, after taking in a massive $38 billion in 2020, according to Lipper,” concludes S&P Global.

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