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Fund Spy

Bank-Loan Funds Are Back: Here Are 2 to Consider

It's a new day for these unique vehicles, which are seeing inflows.

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Bank-loan funds lacked investor appeal in 2019 and 2020 as interest rates fell. But economic recovery and the potential for rising short-term interest rates have put the category back in favor in 2021. Bank-loan mutual funds have received net inflows of more than $13 billion for the year to date through April 2021, which was almost a fourth of the category’s assets at the beginning of the year. Demand for high-yield bond funds has been milder this year despite the similarities of the two asset classes. While high-yield bonds have greater upside potential, bank loans' defensive characteristics make them an attractive portfolio diversifier. Bank loans’ unique floating-rate feature, their hierarchy in the capital structure, and the loan market’s industry composition all make for an appealing relative value opportunity versus high-yield bonds.

Garrett Heine does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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