Emily McKinley, head of institutional ETFs and models at Invesco, said the best institutional use cases for ETFs are those devised by institutions themselves and one she's seen emerge over the past year is institutional clients using the Invesco Senior Loan ETF as a "liquid proxy" for private credit.
Many institutional clients are looking to increase their allocations to private credit, McKinley said in a recent interview.
"There's a lot of money in motion there right now," she said. "Anytime there's money in motion or friction points in the portfolio, that's when ETFs can be additive for institutions."
Though McKinley declined to name the clients, they included multiple pension funds and one endowment, she said.
"BKLN is a really excellent proxy from a correlation perspective to the private credit asset class," said McKinley, referring to the $6.87 billion Invesco Senior Loan ETF by its ticker symbol.
One use case Invesco has seen is when an institutional client is looking to increase its private credit allocation and uses BKLN until it can find the right manager, she said.
"This is a common use case, interim beta," McKinley said.
Another use case that Invesco has seen is institutional clients using BKLN as a "liquid buffer," she said.
"For clients with a strategic long-term allocation to the asset class, the ETF can provide the liquidity to cost effectively adjust exposure, fund liabilities, etc.," McKinley said.
BKLN is based on the Morningstar LSTA US Leveraged Loan 100 Index, according to an overview of the fund available on Invesco's website. The ETF typically will invest at least 80% of its total assets in the component securities that comprise the index.
"Index construction is key to maximizing tradability within the bank loan space," a February Invesco report on BKLN said.
"When designing BKLN, underlying market liquidity was a key consideration and is primarily why Invesco selected the Morningstar LSTA US Leveraged Loan 100 Index (LL100) as BKLN's underlying index," according to the report, which described BKLN as the world's largest, oldest and most liquid senior loan ETF.
Liquidity is "the ultimate institutional bait," said Bloomberg Intelligence Senior ETF Analyst Eric Balchunas.
"I don't care how big of a bank you are … you cannot manufacture the kind of liquidity that BKLN has every day," said Balchunas, adding that institutions can trade BKLN "and nobody even knows they're there. It's instant, they're anonymous."
To get into a private credit fund an institutional investor has to "call somebody, fill out paperwork, it's a whole deal," said the analyst, adding that BKLN is "like the SPY of senior loans," a reference to State Street Global Advisors' SPDR S&P 500 ETF Trust.
SPY, the first ETF listed in the U.S., had $500.3 billion in assets under management as of March 6, SSGA's website shows.
BKLN enables institutional investors to place bets quickly, Balchunas said.
"If they have an opinion, they want to bet on that opinion or hedge or whatever quickly, they'll just buy BKLN," he said.
BKLN had average daily trading volume of $161 million in 2023, according to Invesco data.
As of Jan. 31, Invesco had about $1.58 trillion in total assets under management.
