In the following paper, we explain the four primary reasons why we believe investors should avoid passively managed exchange traded funds (ETFs) in the loan category.

  1. They’re Not Cheap
    Loan ETF fees are multiples higher than ETF fees in other popular investment categories and nearly as much as the fees on active strategies.
  2. Tail Risk
    The ability for active managers to avoid lending to companies in dying industries― thereby avoiding significant tail risk―is a distinct advantage for active managers in the loan category.
  3. Performance
    Passive loan ETFs have historically underperformed some of the top actively managed funds in the Morningstar Bank Loan category.
  4. Correlation
    To provide the liquidity levels demanded by ETF investors, passive managers must make significant compromises to squeeze loans into an ETF structure. The compromises made in creating a loan ETF can lead to it not really offering representative exposure to the broad loan market.

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