Leveraged loan funds endure rocky Q1, while CLO ETFs draw inflows
A loan market rally in April, consecutive weekly inflows to loan funds, and diminished expectations for Fed rate cuts may help reverse what has been a persistent draining of assets under management from these fixed-income funds. In March, AUM at leveraged loan ETFs, mutual funds, and closed-end funds collectively fell by $3.9 billion, to $93.3 billion, according to Morningstar data. It was the eighth consecutive monthly contraction. In that time, AUM at the funds declined by $17.7 billion.
CLO story
While outflows at US loan funds collectively topped $7 billion in the first quarter of the year, per Morningstar’s monthly data, US CLO ETFs have drawn nearly $6 billion of inflows YTD, according to an April 20 Deutsche Bank research report titled “Why have CLO ETF flows remained resilient in 2026?” The Deutsche Bank report notes that AAA CLO funds in particular have benefited from an “up-in-quality” bias this year, and that CLO ETFs have outperformed a cohort of the largest leveraged loan and investment-grade ETFs.
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The loan fund share of the $1.55 trillion Morningstar LSTA US Leveraged Loan Index fell to 6% in March, the lowest reading since November 2009. Over time, CLOs have taken a greater share of the loan market.
Spring awakening
Bid prices for leveraged loans stabilized in March, rising four basis points on the month, to 94.63, and momentum has picked up in April.
Amid strong corporate earnings, it has been a relatively bullish month for US assets, and a 1.24% return for leveraged loans in April has brought the YTD figure into the black. After 11 straight weekly outflows, loan funds have posted consecutive weekly inflows. In secondary markets, the average bid of the Morningstar LSTA US Leveraged Loan Index is up 67 bps on the month, to 95.30, as of April 28. Software credits, which skew toward the lower end of the ratings spectrum and which account for a 12.6% share of the index, more than twice the share of any other subsector, have posted modest gains after a sharp decline in the first two months of the year.
Providing tailwinds for loans has been shifting sentiment around Fed rate cuts. The Fed left the benchmark rate unchanged at its April 29 meeting, and according to CME data, investors no longer expect any rate cuts this year. Earlier this year, investors expected two cuts. Cuts would reduce interest returns from the base-rate portion of floating-rate loans. Meanwhile, the 10-year Treasury yield is up more than a quarter point from last September, when the Fed initiated the first of three quarter-point cuts to the overnight lending rate.
ETF exchange traded fund investment concept. Piggy bank and growth of amount of coins and ETF text. 3d illustration
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This article originally appeared on PitchBook News