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Bond ETF Investors Are Dumping Senior Bank Loans

This article was originally published on ETFTrends.com.

The floating rate component of a senior secured bank loan ETF should have been an attractive attribute of this high-yielding fixed-income strategy, but investors have been exiting the play in droves this year.

The Invesco Senior Loan ETF (NYSEArca: BKLN), the largest ETF dedicated senior secured bank loans, experienced $631.5 million in net outflows over the past month and saw $1.9 billion in outflows year-to-date, according to XTF data.

Loan-related funds have suffered record outflows over the past week after the Federal Reserved pointed to slower-than-expected interest rate hikes for next year, and investors grew increasingly concerned over deteriorating credit quality, the Financial Times reports.

Investors yanked $3.7 billion from funds that track North American bank loans for the week ended Wednesday, pushing total year-to-date flows into negative territory. Loan funds also sustained five consecutive weeks of outflows, totaling $10.8 billion.

The asset category typically attracts investors whom are looking to generate income in a rising interest rate environment due to their floating rate component. However, central banks and agencies like the International Monetary Fund warned that credit quality is declining - bank loans are usual for highly leveraged companies and are rated speculative-grade.

Growth Outlook Concerns

Concerns over the growth outlook also diminished the attractiveness of the asset category, and the dovish stance out of the Fed isn't doing the category any favors either. The U.S. central bank hiked rates by a quarter point but warned of further global financial and economic troubles that reduced its forecast for rate hikes next year.

“If [the Fed’s] willingness to continue to increase rates has gone down, the floating-rate nature of the coupons becomes not as attractive as is was,” Matthew Bartolini, head of Americas research for State Street SPDR exchange traded funds, told the Financial Times.

State Street Global Advisors also offers its own strategy, actively managed SPDR Blackstone/GSO Senior Loan ETF (SRLN) , which witnessed $598 million in outflows over the past month as well.

“You are seeing a more serious de-risking across credit,” Peter Tchir, chief macro strategist at Academy Securities, told FT.

For more information on the fixed-income space, visit our bond ETFs category.