ETFs lead growth in loan fund AUM as outlook on lending rates shifts
Leveraged loan fund assets under management rose by $1.3 billion in May, building on April’s gains after eight consecutive months of declines, according to Morningstar data. ETFs accounted for $1 billion of the growth, while mutual funds added roughly $300 million and closed-end fund assets declined slightly.
The flow of assets has steadied after a rockier Q1, and broadly speaking, even the cumulative $9.5 billion drawdown in February and March was moderate relative to more drastic single-month moves in April 2025 (negative $10.6 billion in the fallout from “Liberation Day”), September 2022 (negative $10.5 billion amid a 75 bps rate hike to combat inflation) and March 2020 (negative $25.9 billion amid the pandemic shutdown). The general trend has been a slow leak — AUM fell by 10.6% in 2025, and it has declined 7.3% in the first five months of 2026.
Secondary market doldrums
While the weighted average bid price rose marginally in May to 95.33, from 95.31 in April, it has since fallen back to 95.04 (through June 24).
The slump in Software sector loans, which have fallen by 1.5 points in June and nine points in 2026, continues to weigh on prices. Dispersion has been acute in the sector, as investors assess companies’ specific vulnerability to AI disruption.
Rate reversal?
Might assets pour back into loan funds? On the one hand, funds that post weekly readings have shown mixed results thus far in June, and loan prices have fallen. On the other hand, after a surprisingly hawkish June Fed meeting, rate hike expectations have risen, and the shifting winds could draw retail investors back to loan funds, given added returns from the floating-rate portion of the debt. Indeed, historical data show that assets tend to flow into loan funds when rates are at a relative minimum (i.e., when the Fed is between a rate-cutting and rate-hiking cycle).
At the Fed’s June meeting, Chairman Kevin Warsh pledged that the Fed would deliver price stability and reinforced the inflation target of 2%. Personal Consumption Expenditures (PCE) inflation was 4.1% on a year-over-year basis in May, with core inflation at 3.4%, the highest since October 2023 and well above that 2% target. CME’s FedWatch tool on June 25 shows a 30% chance of a rate hike at the July Fed meeting, up from 18% one month prior. FedWatch lists a 20% chance the rate will remain at 350-375 bps through the end of the year, and 70% probability of one or two hikes. Rate cuts, which had been expected heading into the year, are off the table, according to CME’s FedWatch, at least for 2026. President Donald Trump has repeatedly called for rate cuts.
Long-term trends
The loan fund share of the Morningstar LSTA US Leveraged Loan Index has fallen over the years, to 6.5%, from a high of 23.8% in February 2014. Within loan funds, ETFs have gained market share since the launch of the Invesco Senior Loan ETF (BKLN) in March 2011. The current breakdown within loan fund AUM is 21% for ETFs, 68% for mutual funds (down from 87% in March 2011), and 11% for closed-end funds.
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This article originally appeared on PitchBook News