The
Invesco Senior Loan ETF (BKLN) is seeing the second highest average daily volume in Invesco’s ETF lineup. What’s causing investors to flock to this senior debt ETF?
The pandemic put credit agencies on alert for more potential defaults during a weakened economy, but a new risk is emerging. Climate risk in the form of harsh winters throughout the U.S. could pose a problem for creditworthiness, which warrants the need for debt investors to be in senior loan position.
“Climate change has made the world a riskier place,” an International Monetary Fund blog article said. “The destruction wrought by heatwaves, droughts, hurricanes, and coastal flooding doesn’t stop with the toll on human lives and livelihoods it can also have deep consequences for a country’s finances.”
Depressed interest rates are prompting advisors and investors to embrace income-generating assets beyond the safest bonds. The
BKLN targets the S&P/LSTA U.S. Leveraged Loan 100 Index. That index “is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments,” according to Invesco.
Leveraged loans usually attract investors who 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 warn that credit quality is declining – bank loans are usual for highly leveraged companies and are rated speculative-grade.
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The chief executive and founder of DoubleLine suggested looking at a beaten-up and unloved sector of credit markets: bank loans. Alex Flynn/Bloomberg
Risks lurk in an overvalued stock market and the bond market with inflation on the horizon, DoubleLine chief executive and founder Jeffrey Gundlach said. But the fund manager dubbed by
Barron’s as the Bond King nearly a decade ago does have one pick for income investors.
In an interview with CNBC, Gundlach suggested looking at a beaten-up and unloved sector of credit markets: bank loans, which ended 2020 with price losses in many cases as fund investors fled the sector. By contrast, fund investors rushed into other parts of the credit market, especially junk bonds, in their quest to grab what little income was available after the Federal Reserve slashed short-term interest rates to zero and provided unprecedented support to the corporate bond market.