ETFs Lead Loan Fund Growth as Outlook Shifts on Lending Rates

Leveraged loan fund assets under management rose by $1.3 billion in May 2026, building on April’s gains after eight consecutive months of declines, according to Morningstar data. ETFs accounted for $1 billion of the growth, mutual funds added roughly $300 million, and closed-end fund assets declined slightly.

The flow of assets has steadied after a rockier first quarter. Broadly speaking, even the cumulative $9.5 billion drawdown in February and March was moderate relative to more drastic single-month moves in April 2025 (negative $10.6 billion amid the fallout of “Liberation Day”), September 2022 (negative $10.5 billion amid a 75bps rate hike to combat inflation), and March 2020 (negative $25.9 billion amid the covid-19 shutdown). The general trend has been a slow leak—AUM fell by 10.6% in 2025 and declined 7.3% in the first five months of 2026.

Secondary Market Doldrums

While the weighted-average bid price of the Morningstar LSTA US Leveraged Loan Index rose marginally in May to 95.33 from 95.31 in April, it has since fallen back to 95.04 (through June 24).

The slump in software sector loans (which have fallen 1.5 points in June and 9.0 points in 2026 so far) continues to weigh on prices. Dispersion has been acute in the sector as investors assess companies’ specific vulnerability to AI disruption.

Rate Reversal?

Might assets pour back into loan funds? On the one hand, funds that post weekly readings have shown mixed results in June, and loan prices have fallen. On the other hand, after a surprisingly hawkish June Federal Reserve meeting, expectations of rate hikes have risen. The shifting winds could draw retail investors back to loan funds, given added returns from the floating-rate portion of the debt. Indeed, historical data shows that assets tend to flow into loan funds when rates are at a relative minimum (i.e., when the Fed is between a rate-cutting and rate-hiking cycle).

At the Fed’s June meeting, Chairman Kevin Warsh pledged that the central bank would deliver price stability and reinforced its inflation target of 2%. Personal Consumption Expenditures inflation was 4.1% on a year-over-year basis in May, with core inflation at 3.4%, the highest since October 2023 and well above that 2.0% target. On June 25, CME’s FedWatch tool showed a 30% chance of a rate hike at the July Fed meeting, up from 18% one month prior. FedWatch lists a 20% chance that the rate will remain at 350-375bps through the end of the year, and 70% probability of one or two hikes. FedWatch now believes rate cuts, which had been expected heading into the year, are off the table for 2026. President Donald Trump has repeatedly called for cuts.

Long-Term Trends

The loan fund share of the LSTA US Leveraged Loan Index has fallen over the years to 6.5% from a high of 23.8% in February 2014. ETFs have gained market share here since the launch of the Invesco Senior Loan ETF BKLN

in March 2011. The current breakdown within loan fund AUM is 21% for ETFs, 68% for mutual funds (down from 87% in March 2011), and 11% for closed-end funds.