High-Yielding ETFs Make Bank Loan Market More Volatile: Report

ETF Trends

The rise of bank loan ETFs driven by yield-seeking investors is having an impact on the underlying market, according to a report Monday.

ETFs “might be a small part of the market, but they can have an outsized impact on market prices relative to their size,” Eric Gross, a credit strategist at Barclays, told Bloomberg News. “Investors and traders need to be cognizant of what the ETFs are doing because they can affect pricing, sentiment, and flows.”

PowerShares Senior Loan Portfolio (BKLN), Highland/iBoxx Senior Loan (SNLN), First Trust Senior Loan Fund (FTSL) and SPDR Blackstone/GSO Senior Loan ETF (SRLN) are the ETFs that invest in senior loans. [Senior Loan ETFs: ‘Steady Returns and Higher Yields’]

BKLN is the largest fund in the group with assets of about $5.2 billion. Trading in BKLN has increased more than 12 times this year, according to Bloomberg. SRLN, an actively managed ETF, has quickly amassed more than $480 billion since launching in April. [2013 Could be the Year of the Bank Loan ETF]

Investors have been drawn to bank loan ETFs for their decent yields and protection from rising interest rates, since they track floating-rate securities.

However, that growth as triggered concerns the ETFs are influencing the leveraged loan market as more retail investors participate.

“Mutual funds and ETFs now own about 20% of the U.S. leveraged-loan market, about the most ever, and may contribute to bigger price swings going forward,” Bloomberg reported.

Next page: ‘Retail investors filling the void’

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