Data from State Street Bank showed that investors increased their risk appetite in bonds in June and pursued the prospect of higher yields as uncertainty about Federal Reserve policy remained. The asset manager found that flows to fixed-income exchange-traded funds approached $25 billion last month, with investors increasing exposure to long-term government bonds to more than $6 billion. However, investors are content with adding credit risk, too, putting more than $1.6 billion into ETFs with underlying bank loans and collateralized loan obligations (CLOs), State Street found. “These funds have now had 13 consecutive months of inflows, absorbing more than $18 billion in that period, as investors look to rising interest rate risks amid changing monetary policy,” wrote Matthew Bartolini, director of SPDR Americas Research. Limited exposure to interest rate fluctuations. Chasing Yield Bank loans and mortgage bonds are both available in today’s high interest rate environment where large institutional investors can purchase bank loans (lenders that make loans to companies) and benefit from the loan’s floating coupon rate. Benefit. With interest rates remaining high, these coupons offer attractive yields, but they are secured by the borrower’s assets – which often means that if the borrower goes bankrupt, the loan will be lost. People will be the first choice to get paid. CLOs are similar to bank loans: these are pools of floating-rate loans that can be non-investment grade. The CLO itself is made up of multiple tranches, each with its own corresponding risk characteristics. If a borrower goes bankrupt, top-ranked CLOs (or CLOs deemed triple-A by rating agencies) will be paid out first, although the floating-rate portion of these assets allows them to perform well in a rising interest rate environment. As policies begin to taper, investors may see their income decline. Snapping up actual bank loans and CLOs is beyond the capabilities of individual investors, but they can gain exposure to this space through ETFs, although these strategies should not account for investors. A large portion of the income allocation, but they may only be a small part of a diversified portfolio. For example, the BlackRock Floating Rate Loan ETF (BRLN) has an expense ratio of 0.55% and a 30-day SEC yield of over 8% in the CLO space. , the Janus Henderson AAA CLO ETF (JAAA) has become a popular choice, with flows approaching $5.4 billion in 2024, according to FactSet. Its expense ratio is 0.21% and its 30-day SEC yield is 6.6%, Bartolini said. In an interview with CNBC, he said that investors’ pursuit of yield comes at a time of strong economic strength, earnings growth and improving rating momentum. “We are now finally getting more upgrades versus downgrades on high-yield and investment-grade bonds. . ” He also noted that while investors may view bank loans and mortgage bonds as inherently risky due to exposure to below-investment-grade borrowers, they should pay close attention while Fed policy remains uncertain Other aspects of its portfolio are exposed to interest rate fluctuations. Bank loans and mortgage bonds tend to be less price sensitive to changes in interest rates, meaning their shorter maturities tend to have longer maturities. “Interest rate volatility is one of the bigger risks in a bond portfolio right now,” Bartolini said. “Interest rate policy is evolving and uncertain, and things are unlikely to get cloudier as we head into summer. “
