Cue The Bank Loan ETF Bubble Talk
There are plenty of old pastimes on Wall Street. Among the most prominent are clarion calls that whenever a particular sector or market niche becomes popular in short order that a bubble is right around the corner.
Of course, not all bubble calls are accurate and some take years to materialize. Sure, those that said gold was in a bubble when it was at $1,500 an ounce several years ago ended being right. Sort of. On the way to those bubble criers being "right," gold rose to about $1,900 an ounce.
Well, it might just be a matter of time before the bubble calls migrate over to bank loan ETFs. Consider this: In just the past 30 days, the PowerShares Senior Loan Portfolio (NYSE: BKLN) has hauled in $740.2 million in assets, according to PowerShares data.
BKLN is the undisputed "big kahuna" of senior loan ETFs. The ETF is just 26 months old and already has almost $3.8 billion in AUM, over $1 billion of which came into the ETF in 2012. Year-to-date, BKLN is by far the top asset-gatherer among PowerShares ETFs with $2.26 billion in inflows. That compares to $1.77 billion in year-to-date inflows for the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV).
More important than its asset-gathering ability, BKLN has defied talk of bubbles and the end of the rally in junk bond ETFs. At this point it is fair to say that everyone that thought the rally in high-yield bond ETFs was fading was wrong because nearly all of these ETFs are trading at or near new 52-week highs.
BKLN touched a new 52-week Thursday. Including dividends, which BKLN delivers monthly, the ETF is up 7.5 percent in the past year, 2.4 percent year-to-date and 1.2 percent in the past 90 days.
While BKLN is the king of the senior loan ETF space, issuers have realized yield-hungry investors may be able to support ETFs in this niche. The emergence of competitors to BKLN is enough to keep the bubble birds crowing. Inflows to these ETFs perhaps only making the crowing louder.
BKLN's first true competitor, the Highland iBoxx Senior Loan ETF (NYSE: SNLN) debuted in November 2012. Being a one-ETF shop is a lot like being a one-car NASCAR team. It is possible to be successful, but the mountain to climb is high. Still, SRLN has $72.8 million in AUM.
Or it can be said SRLN has attracted an average of $12.1 million in assets per month since its debut.
Speaking of rapid accumulation of assets, take a look at the SPDR Blackstone/GSO Senior Loan ETF (NYSE: SRLN). Despite being 34 basis points pricier per year than BKLN (0.9 percent for SRLN, 0.66 percent for BKLN), the new SPDR offering has hauled in $160.4 million in AUM just one month of trading.
Undaunted, First Trust launched the First Trust Senior Loan ETF (NASDAQ: FTSL), an actively managed senior loan ETF, on Thursday.
Rapid accumulation of assets as a harbinger of a bubble is a theoretical gambit that even if accurate could take years to prove accurate. That is one issue that should be highlighted with regards to bank loan ETFs.
Another is the perceived lack of liquidity within the asset class, a frequent point of criticism by junk bond naysayers. Along those lines, it should be noted that a 2 million-share order was executed in BKLN on Thursday, according to Bloomberg. That order barely moved the ETF.
In fact, BKLN is showing signs of increased liquidity. In the second and third quarters of 2012, the ETF had a combined 47 trading days when the midpoint of its bid/ask spread was 50 to 99 basis points above the fund's net asset value. That did not happen at all in the fourth quarter and the first quarter of this year, according to PowerShares data.
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