Loan ETF Outflows Hit Daily Record of $1.3 billion

By Matt Wirz

Investors pulled $1.3 billion out of exchange traded funds holding corporate loans with junk credit ratings on Friday, the biggest daily outflow on record, according to research by JPMorgan Chase. The exodus shows how the meltdown in stocks is starting to spread to the riskier parts of the debt market.

The selling is hitting stocks of ETFs that had been particularly in-demand until recently. Shares of a leveraged loan ETF managed by Invesco dropped about 3% last week. More worrying, a fund managed by Janus Henderson that invests in collateralized loan obligations, or CLOs, with investment-grade and junk credit ratings dropped more than 4%. Friday's ETF outflows comprised $1.1 billion from loan funds and $238 million from CLO funds.

Individual investors have piled into funds that buy leveraged loans and CLOs in recent years expecting them to outperform bonds amid high prevailing interest rates. Interest rates on corporate loans move in tandem with benchmark rates, giving them ballast when Treasury yields move higher, pushing prices of corporate bonds down. Fund management companies cashed in on the trend by promoting and launching low-cost ETFs in the asset class.

While the loans have less-interest-rate risk, they are harder to trade than bonds, meaning that prices can gap unexpectedly in periods of high market volatility. The loans also carry more recession risk because, on average, the companies that borrow them are more heavily indebted than borrowers of investment-grade and junk corporate bonds. That gives them less financial cushion during economic downturn.

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