A leveraged loan index tracks how a basket of loans made to heavily indebted or lower rated companies performs over time, giving investors a market weighted snapshot of a corner of credit markets that pays more but carries sharper risk than typical investment grade bonds.
At a Glance
- Leveraged loan indexes measure institutional loans issued to companies with high debt loads or weak credit
- The S&P/LSTA U.S. Leveraged Loan 100 Index is the most widely cited benchmark
- Indexes are rebalanced twice a year and cover roughly the 100 largest, most liquid loans
- ETFs such as Invesco's BKLN use these indexes as a template for passive investing
- Some indexes track credit default swaps tied to leveraged loans rather than the loans themselves
What Counts as a Leveraged Loan
Leveraged loans go to borrowers already carrying substantial debt or a shaky credit history, which is why lenders demand higher interest in exchange for the added risk. Rather than one bank shouldering the whole loan, these deals typically get syndicated: a group of lenders each fund a slice, spreading out exposure so no single institution is overly exposed if the borrower stumbles.
How the Benchmarks Are Built
The best known leveraged loan index comes from Standard & Poor's and the Loan Syndications and Trading Association. Their flagship gauge captures the 100 largest and most actively traded loans in the institutional market. A related version, the U.S. Leveraged Loan 100 B/BB Rating Index, narrows the focus to loans rated B or BB. S&P also runs a Global Leveraged Loan 100 Index that folds in major European issuers. Both get rebalanced twice yearly. IHS Markit and Credit Suisse maintain their own competing indexes as well.
Quick Facts
- The flagship S&P/LSTA index covers 100 of the largest, most liquid institutional loans
- Rebalancing happens on a semiannual schedule
- Invesco's BKLN fund invests at least 80% of assets in the index's component loans
- The iTraxx LevX indexes track credit default swaps on 40 liquid European companies, up from 35 previously
Where These Indexes Show Up in Real Portfolios
Fund managers running leveraged loan strategies lean on these indexes as a yardstick for judging their own performance. They also form the backbone of passive products. The Invesco Senior Loan Portfolio, traded under the ticker BKLN, mirrors the S&P/LSTA U.S. Leveraged Loan 100 Index by putting at least 80% of its assets into the same loans that make up the benchmark. When a fund holds less than the full slate of index components, its returns can drift away from the index itself, sometimes in ways investors don't expect.
That gap between fund and benchmark is worth watching closely if you're evaluating a leveraged loan ETF, since even small deviations in holdings can add up over time.
Credit Default Swaps Built Around Leveraged Loans
Not every leveraged loan index tracks the loans directly. The iTraxx LevX family instead holds credit default swaps tied to a basket of the 40 most liquid European companies with tradable debt in the secondary market. These are known as leveraged loan credit default swaps, and the family splits into two versions: the iTraxx LevX Senior Index, which covers only senior loans, and the iTraxx LevX Subordinated Index, which covers subordinated debt including second and third lien loans.
Weighing the Higher Yield Against the Higher Risk
The appeal of leveraged loans is straightforward: borrowers with weaker credit profiles have to pay more to attract lenders, and that extra yield flows through to anyone invested in a fund or index tracking these assets. The trade off is equally straightforward. These are riskier borrowers, and a downturn in the economy or a company specific stumble can hit returns harder than it would in an investment grade portfolio. Anyone considering exposure to this space, whether through an ETF like BKLN or a fund benchmarked against the S&P/LSTA index, should weigh that higher income against the added chance of loss, and keep an eye on how closely their chosen fund actually tracks its underlying index.