Recent buying and selling patterns in exchange traded funds suggest some income-hungry investors are rotating away from junk bonds and into bank loan ETFs with attractive yields.
For example, since the end of September, investors have pulled $607.6 million from iShares iBoxx High Yield Corporate Bond (HYG) and $532.5 million from SPDR Barclays High Yield Bond (JNK), according to IndexUniverse flow data.
Since then, they have added $405.1 million to PowerShares Senior Loan Portfolio (BKLN).
The bank loan ETF has a 30-day SEC yield of 4.6%, while the junk bond ETFs are paying nearly 6%.
Also, Blackstone‘s GSO Capital Partners and State Street Global Advisors have filed to launch an actively managed bank loan ETF. [Blackstone and State Street Ready Senior Loan ETF]
Morningstar analyst Timothy Strauts calls BKLN a satellite ETF holding for investors who are comfortable with higher credit risk and looking for floating-rate bonds to protect against rising interest rates.
“Bank loans are denoted high-yield for the sole reason that firms issuing them are highly leveraged,” he says. “With increased leverage comes the increased probability of default and bankruptcy.”
Bank loans are safer than traditional high-yield bonds because they are secured by collateral and have lower defaults rates, Strauts adds.
BKLN has grown to become the third-largest speculative-grade debt ETF with $1.2 billion of assets, Bloomberg News reported Tuesday. Bank loan ETFs are attracting flows amid concerns that junk bonds are losing momentum after more than doubling since 2008. The spread between yields on bonds and loans has fallen to less than half the historic average amid the Federal Reserve’s bond-buying programs, it said.
“Loans are a compelling asset class compared to high yield at these levels,” said Jason Rosiak, the head of portfolio management at Pacific Asset Management, in the Bloomberg story. “ETFs regardless of the asset class are becoming a more widely used vehicle to express a view.”
Over the last week, the average trading volume in BKLN has surged to almost three times the average for the past six months, according to the story.
PowerShares Senior Loan Portfolio
Update — Full disclosure: Tom Lydon’s clients own HYG and JNK.
The opinions and forecasts expressed herein are solely those of John Spence, 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.