Senior Loan ETF Sees Massive Outflows as Credit Cracks Deepen
(Bloomberg) -- Investors are fleeing an exchange-traded fund that tracks an index of low-grade debt as cracks spread across credit markets.
The $6.4 billion Invesco Senior Loan ETF, ticker BKLN, has seen seven straight days of outflows, with investors pulling about $660 million since Nov. 13. More than $129 million came out on Wednesday alone, which reduced the fund’s assets by 2 percent. Assets now stand at their lowest in more than two years.
Through the pre-Thanksgiving close, shares of the fund, the largest passive vehicle backed by the risky debt, are down about 1.6 percent since the recent spate of outflows and have reached their lowest since April 2016. The S&P/LSTA Leveraged Loan Index, BKLN’s underlying benchmark, is also down nearly 0.7 percent over the same span.
Investors traded about 29 million shares of BKLN, worth $654 million, on Tuesday, a record trading day for the fund and more than eight times its average daily turnover for the past five years.
“Outflows for BKLN have most probably to do with the most recent deterioration of the credit environment,” Yannis Couletsis, principal at Credence Capital Management Ltd., said in an email. He ascribed the ETF’s drift on the deterioration of low-grade credit and “repricing of investors’ forecast regarding the path of Federal Reserve’s interest rate hikes.”
Couletsis pointed to widening credit spreads and the fact that BKLN has floating-rate underlying instruments, assets that become less attractive than fixed-rate ones should the Fed skip its March rate hike, as some are anticipating.
Cracks in the credit market are spreading, with investor anxiety over mounting debt weighing on corporate America, alongside rising rates, slower growth and volatile oil prices. U.S. junk spreads have widened the most in nearly two years and yields popped to a 30-month high this month. Investment grade bonds are on track for their worst year in terms of total returns since 2008.
“The price action in the ETF hasn’t warranted investors to justify keeping it on to collect the monthly coupon it pays,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital. “The risk/reward hasn’t been there compared to short-term treasury products like JPST,” he added, referring to the $4.2 billion JPMorgan Ultra-Short Income ETF, which hasn’t seen a daily outflow since April 9.
Leveraged loans in the U.S., which outperformed traditional fixed-rate peers all year, may no longer be the “star performer” amid a potential pause in rate hikes by the Fed, Citigroup strategists Michael Anderson and Philip Dobrinov wrote in a note Tuesday. Investors have pulled nearly $1.5 billion from loan funds since mid-October as they’ve offloaded better quality loans to raise cash, Anderson and Dobrinov wrote. That’s despite leveraged loan issuance being at its highest since 2008 and returns on the S&P/LSTA Leveraged Loan Index at about 3.5 percent so far this year.
If investors are, indeed, unloading to raise cash, Anderson and Dobrinov wrote, “this is a bearish sign, particularly if outflows persist and managers eventually turn to deep discount paper for cash. Furthermore, as we get closer to the end of the Fed’s hiking cycle, we expect further outflows as traditional fixed-rate credit products become more in vogue.”
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