Goldman Cautious on Leveraged Loan Flows

ETF Trends

For a while now, it has seemed as though exchange traded funds holding senior bank loans have among the toasts of the town in the bond ETF universe.

Not only do ETFs such as the PowerShares Senior Loan Portfolio (BKLN) offer high yields, but these funds also feature diminished interest rate risk because bank loans act like floating rate notes to an extent because the rates on the loans are reset every month or two months. [Bank Loan ETFs Continue to Thrive]

Despite the advantages of bank loan ETFs, not all market observers are convinced go-go days for these funds will last forever.

“I would just caution those that are involved in the loan space to be mindful of the fact that they’ve been beneficiaries of inflows for 88 straight weeks and the tide can turn,” said Justin Gmelich, the head of credit trading at Goldman Sachs Group, in a video on Goldman’s web site.

Bank loans have “seen unprecedented demand with the funds that purchase the debt receiving deposits every single week since the summer of 2012. That enabled speculative-grade companies to raise $676 billion last year of bank debt, with more than 80 percent of that used to escape maturing debt deadlines,” writes Sridhar Natarajan for Bloomberg.

Indeed, investors have warmed to bank loan ETFs in noticeable fashion.  PowerShares tracks flows data for its ETF over 12 months, year-to-date, the past 90 days, 30 days and week. Over each of those time frames, BKLN ranks as the second-best PowerShares ETF in terms of inflows. The fund now has $7 billion in assets under management, $4.6 billion of which has come into the ETF in the past year.

A pair of actively managed rivals to BKLN debuted last year, each quickly gaining assets. The SPDR Blackstone/GSO Senior Loan ETF (SRLN) is just 11 months old and already has $616.5 million in assets. First Trust Senior Loan Fund (FTSL) debuted in early May 2013 and has nearly $164 million in assets. [New ETFs Off to Fast Starts]

Some investors have questioned the liquidity of the bank loan market.  Others have warned that the trading rate risk for higher credit risk is not worth it because bank loans would be vulnerable in the event of a U.S. recession.

That has not stopped cash from pouring into these funds. Retail inflow to loan mutual funds for 2014 was $4.6 billion as of Feb. 20, Bloomberg reported, citing Bank of America.

PowerShares Senior Loan Portfolio

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ETF Trends editorial team contributed to this post.

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.

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