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Investing Specialists

Bank Loans Appealing but Far From a Cash Alternative

These funds are best used to augment--rather than supplant--high-quality fixed-income exposure.


Asset inflows into bank-loan funds slowed toward the end of 2011, but investors have demonstrated ample enthusiasm for the group during the past year. More than $7 billion in new assets had flowed into the category so far in 2012 through October. That's less than the amount that has gone into some categories, but year-to-date inflows still represent more than 10% of the bank-loan category's total assets.

What's Not to Like?
Given the current fixed-income environment, you don't have to squint too hard to see what investors have found attractive about these funds. For starters, their robust yields are compelling, particularly given the anemic payouts from competing investments. The median bank-loan fund has a 12-month trailing yield of about 4.7%, nearly 2 percentage points higher than the median intermediate-term bond fund's 12-month yield. Although SEC yields aren't available for every fund on, many bank-loan funds still sport SEC yields of more than 4%. (SEC yield provides a more current snapshot of prevailing payouts than does trailing 12-month yield.)

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