FT Alphaville's Tracy Alloway reported on ETFs tracking portfolios of floating rate bank loans and how they are left exposed to certain "hiccups" in the cash redemption process.

Alloway writes that these loans are considered an odd thing for ETFs to track as they trade "on assignment" making the ETF a direct signatory to the loan. Usually ETFs shares can be exchanged for a basket of underlying securities, Alloway reports, but in this case, they can only exchange shares for cash.

That spells trouble in the redemption process, Alloway writes. Alloway quoted Barclays credit analysts research in regards to the halt on municipal bond ETF redemptions, which read, "Given that share creation and redemption for loan ETFs is done exclusively in cash at the moment, concerns arose about whether a similar situation could occur in the loan ETF market. Since loss trade on assignment, which explains why ETFs do not create and redeem in kind, we do not believe loan ETF administrators could turn off cash redemptions for any period of time."

To read more, click here.  

Edited by: Casey Quinlan


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