Rising U.S. Treasury yields, the yields on 10-years are up more than 30 percent in the past 90 days, have sparked rampant chatter that the multi-decade U.S. bond bull market is coming to end. Tell that to bank loan ETFs.
Bank loan ETFs have not only dealt with speculation that the bond bull market is ending, but frequent talk of the demise of high-yield bonds and criticism the senior loan market is illiquid, making it more vulnerable to out-sized retrenchment during periods of elevated market stress.
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Related: Cue The Bank Loan ETF Bubble Talk.
Doubters of the ability of these ETFs to keep attracting inflows should consider this: Inflows to bank loan funds (mutual funds and ETFs), have been positive for 65 consecutive weeks, according to Barron's.
Senior loans, referred to as such because holders of these bonds are ushered to near the front of the line for some compensation in the event of issuer default and bankruptcy, hold secured debt instruments issued by below-investment-grade companies. The loans have variable rates that adjust every 30 to 90 days and the loan is secured by some form of collateral, either hard assets, like equipment or buildings, or accounts receivable.
Although competition in the senior loan ETF space has increased noticeably this year, the king is still the PowerShares Senior Loan Portfolio (NYSE:BKLN). Year-to-date, BKLN is the top asset gatherer among PowerShares ETFs, no small feat given that the firm is the fourth-largest U.S. ETF sponsor with over 80 ETFs.
BKLN has hauled in over $4 billion in assets this year, according to PowerShares data. That is nearly quadruple the second-best PowerShares ETF by that metric, the PowerShares Buyback Achievers Portfolio (NYSE:PKW).
Over the same 90-day period in which Treasury yields have spiked, BKLN has raked in $925.4 million in new investments. On the other hand, the PIMCO Total Return ETF (NYSE:BOND), an ETF that some pundits anointed as the savior of actively managed ETFs, has seen outflows of $792 million.
Speaking of actively managed, it is a concept that has gained traction with bank loan ETFs. The First Trust Senior Loan Fund (NASDAQ:FTSL) is just five months old and has $66.5 million in assets under management. The SPDR Blackstone / GSO Senior Loan ETF (NYSE:SRLN) is six months old and has $525.5 million in AUM.
Flows to bank loan ETFs may also be a sign that although Treasury yields are rising, investors are not as concerned as previously believed regarding elevated spreads relative to junk bonds. Over the past three months, the SPDR Barclays High Yield Bond ETF (NYSE:JNK) has lost $1.1 billion, but that does not mean the junk bond ETF trade is dead. With 88 percent of BKLN's holdings rated BB or B, it is hard to say investors have lost their appetite for high-yield bond ETFs.
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Disclosure: Author does not own the securities mentioned here.
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