High-yield fixed income assets, including the Invesco Senior Loan ETF (NYSEArca: BKLN), aren’t always the first corner of the bond market that retirees rush to, but with yields on Treasuries and municipal bonds near rock-bottom levels, small doses of BKLN in retirement portfolios could boost income profiles.
BKLN sports a 30-day SEC yield of 2.77% — tempting by today’s standards. The Invesco fund tracks the S&P/LSTA U.S. Leveraged Loan 100 Index. That gauge “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.
In a sign that investors are embracing bank loans as sources of yield, BKLN’s month-to-date inflows are approaching $306 million. Year-to-date, investors have added $1.8 billion to the fund, a significant percentage of its $6.61 billion in assets under management. Those inflows come against the backdrop of rising issuance of leveraged loans.
“Leveraged loan issuance to the end of June 2021 climbed to US$763.5 billion, up 60 percent from US$478.1 billion over the same period in 2020,” reports JD Supra. “Institutional loans, i.e., the portions (tranches) of a loan that are structured/sold to non-banks, such as funds, pensions and insurance companies, have seen an even sharper rise. Issuance climbed from US$288.7 billion in 2020 to US$520.4 billion year-on-year, supported by investor demand.”
BKLN employs a sampling methodology, meaning that it doesn’t hold all the components found in the S&P/LSTA U.S. Leveraged Loan 100 Index. Rather, the Invesco fund is home to 144 issues.
Sectors where sizable portions of BKLN’s issuance hail from include communication services, consumer discretionary, and technology. Of interest to investors who are considering BKLN is the fact that many leveraged loan issuers are taking advantage of low interest rates. While that may depress yields, it also lowers issuers’ financing costs.
“Refinancing and repricing deals in US loan markets reached US$471.7 billion by the end of June 2021 and accounted for 62 percent of overall loan issuance in that period. Refinancing and repricing expanded even faster in the institutional loan market—up 92 percent on the same period in 2020, reaching US$329.7 billion and accounting for 63 percent of total institutional issuance,” according to JD Supra.
Other positives for BKLN include low high-yield default rates this year and credit quality that isn’t too risky. 92% of BKLN’s holdings are rated BBB, BB, or B on the S&P scale.
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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.