Investors looking for yield are turning to exchange-traded funds that track prime bank loans, a fund manager says.
An example is Invesco Senior Loan ETF (BKLN) which follows the market-weighted development of the 100 largest senior bank loans and has a return of 3.8%.
Senior bank loans are debt securities issued by banks to businesses, and they have what are called variable interest rates, meaning they regularly adjust to the market. These are generally favorable in a rising rate environment.
Over the past year, the BKLN ETF has gone from steady outflows to strong inflows as inflation concerns among investors have grown, Anna Paglia, global head of ETFs and index strategies at Invesco, told “ETFs on Monday. Edge ” from CNBC.
“Now it seems that clients are really looking at that return history, and this fund is the perfect vehicle for that,” added Paglia, who oversees the BKLN ETF.
“They can give you a return that you might not expect to see if you look at liquid corporate bonds, it’s a different funding structure,” Dave Nadig, financial futurist at VettaFi, said in the same segment. “But this pursuit of yield is up and down the product line.”
Paglia and Nadig say they have seen an increase in interest in short-term bond funds such as BKLN and ultra-short duration funds such as Invesco Treasury Backstop ETF (CLTL) as investors look for cash alternatives. “Short-term” refers to five to six years, while ultra-short is generally less than six months.
With all these new products generating a real return, advisers may want to reconsider how much of the portfolio should now be allocated to bonds, Nadig points out.
“They’re really trying to understand all these new betas coming to market and how they’re really going to interact in the pricing environment that we can project for next year,” he said.