Bank Loan ETFs Enjoy Stellar Second Quarter

Among the exchange-traded funds benefiting from investors' thirst for yield and fixed income are bank loan funds, including the PowerShares Exchange-Traded Fund Trust II (NYSE:BKLN) and the actively managed SSGA Actice ETF Trust (NYSE:SRLN).

Floating rate notes and senior loans are unique in that their yield is tied to a benchmark such as LIBOR, rather than being fixed. Loans are also higher on the capital structure than other unsecured obligations, and some even carry floors to insure you earn a respectable yield even if rates stay low. Their coupon rate typically resets every 90 days, resulting in a duration shorter than three months, Benzinga reported last year.

Bank or senior loans were viewed as vulnerable to hawkish changes in Federal Reserve monetary policy, a scenario that plagued BKLN and SRLN. However, the Fed has yet to raise rates this year, helping investors renew their affinity for high-yielding assets such as senior loan ETFs.

Recent Performance

That renewed affinity was on display in significant fashion during the second quarter.

Following on from an impressive March, ETFs tracking US leveraged loans saw their best quarterly inflow in two years. According to Markits ETP analytics service, ETFs tracking leveraged loans indices saw $614 million of inflows in Q2, the highest since Q1 2014 when over $1 billion was poured into the asset class. Leveraged loans ETFs now have $6.3 billion of AUM, said Markit in a recent note.

During the second quarter, BKLN, the largest leveraged loan ETF, added nearly $513 million in new assets, according to PowerShares data. Only two other PowerShares saw larger inflows during the second quarter.

BKLN follows the S&P/LSTA U.S. Leveraged Loan 100 Index. In the event of issuer default, senior loans reside higher on the claims totem pole than traditional corporate bonds or preferred stock, meaning holders of these bonds have higher claims probability if the issuer goes bankrupt.

Its been quite a turnaround for the leveraged loans this year. The Markit iBoxx USD Liquid Leveraged Loans Index had experienced four consecutive months of negative returns (November 2015 through to February 2016), before rallying in relief in the following three months. At one point in February, leveraged loans were down nearly 2 percent on a total return basis, but have since erased those losses to end the first half of this year up 4.48 percent, added Markit.

BKLN and SRLN are up an average of 4 percent this year, while being significantly less volatile than standard high-yield corporate bond ETFs.