As investors seek a respite from rising inflation, demand for exchange-traded funds that invest in senior loans has skyrocketed this year.

According to data from CFRA Research, so far this year, the industry has invested a net 7.3 billion US dollars, and its asset base has almost doubled to 16 billion US dollars.

This trend is related to rising inflation and interest rate expectations in the United States and elsewhere, leading investors to prefer floating-rate loans to fixed-rate bonds.

“This is a long-term model,” said Ben Johnson, head of research for Morningstar’s global ETF. “This is almost a barometer of investors’ expectations for the direction of future interest rates. When people are worried about the possibility of an increase, we see capital inflows.”

Todd Rosenbluth, CFRA ETF and Mutual Fund Research Director, added: “As investors become more willing to invest in fixed income ETFs, the demand for senior loan ETFs will skyrocket in 2021.” “With Compared with traditional credit, they are less sensitive to interest rates.”

High-end loan ETFs invest in speculative-grade securities, as are high-yield funds, which have recently experienced capital outflows, but provide higher returns for investors who lack income. However, the securities held by these funds are more advanced in the capital structure and have lower volatility.

According to data from CFRA and consulting firm ETFGI, although priority loan ETFs accounted for only 0.6% of global fixed income assets at the beginning of the year, they accounted for 6.5% of net inflows in 2021.

These figures mark a sharp reversal of fate. Bill Ahmuty, head of the fixed income department of State Street Global Advisors, said that senior loan mutual funds and ETFs had net outflows of approximately $65 billion between the end of 2018 and the end of 2020.

“In August/September last year, people’s perceptions of interest rates started to change. We started to see long-term interest rates rise. That was when we turned, we started to see asset class returns,” he said.

“They want to shorten the duration of their portfolios in order to switch to floating rate products.”

Ahmuty said that so far this year, the net inflow of senior loan mutual funds and ETFs has reached US$20 billion, of which ETFs account for a disproportionate share. He attributed this to the solid performance of the fund structure during the Covid-driven volatility surge last year. .

SPDR Blackstone Senior Loan ETF (SRLN) Is the second largest ETF in this category. So far this year, its assets have tripled to reach US$6.5 billion. Pension funds, wealth advisers, insurance companies and even loan managers have bought in, using the fund to quickly access the asset class.

According to SPDR data, historically, the annual volatility of loans was 5.8%, while the volatility of high-yield bonds was 7.7%. The average yield on senior loans is usually slightly lower at 3.7%, while the average yield on high-yield bonds is 4.2%.

However, they tend to invest in less liquid securities and tend to charge higher fees. The US$6.7 billion Invesco Senior Loan ETF (Beijing) Is the largest fund in the industry, with an expense ratio of 0.67%, while Blackstone’s SRLN is 0.7%.

A high percentage of senior loan ETFs are actively managed, including SRLN, First Trust Senior Loan ETF (FTSL) And Franklin Free Senior Loan ETF (FLBL). Rosenbluth stated that approximately 57% of senior loan ETF assets are active, which is very large considering that 90% of the broader fixed-income ETF market and 96% of overall ETF assets are passively managed.

Johnson said that loan liquidity is “more suitable for discretionary management than indexation,” adding that “it is not that difficult for active managers to do better than benchmarks.”

Rosenbluth said that, compared with passive ETFs, active funds have higher exposure to lower-level triple C and single B credit, which has helped their performance so far this year to be about 1.5-2 percentage points higher.

“Proactive managers have taken more credit risk in the senior loan area. Active managers are doing their own credit risk and default analysis,” he said.