(ETF Trends) -- High-yield corporate bonds and the related ETFs are again being embraced by investors this year.
The tide could turn for high-yield bond ETFs, especially now that the Federal Reserve is sounding more accommodative with respect to interest rate policy. Following the fourth and final rate hike of 2018, the central bank mentioned paring down its rate hikes to two rather the its original forecast of three.
Some bond market observers are even speculating that the Fed could not raise rates at all this year, which would be a boon for higher-yielding assets. However, while some junk bond ETFs are performing well this year, investors have been departing senior or leveraged loan funds.
For example, the Invesco Senior Loan ETF, the largest leveraged loan ETF, has seen 2019 outflows of $319.16 million, a total exceeded by just one other Invesco ETF.
Leveraged loans usually attract 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.
Why It’s Important
“Investors have pulled money out of leveraged-loan funds for 13 consecutive weeks, according to Lipper. For the last three weeks, they’ve been pouring money into junk-bond funds, including a $3.86 billion of inflow earlier this month that was the biggest since July 2016,” reports Bloomberg.
The $5.26 billion BKLN follows the S&P/LSTA U.S. Leveraged Loan 100 Index and holds 117 leveraged loans. BKLN’s three-month LIBOR is 2.68% and its days to reset is 24.50.
Since rates are typically reset once per quarter, senior loans typically have low durations – a measure of a bond fund’s sensitivity to changes in interest rates. The floating-rate component also offer investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute to traditional corporate debt in a rising rate environment.
BKLN has a 30-day SEC yield of 5.62% and is up 4% this year.
