What’s the role of indices in the fast-growing leveraged loans market? S&P DJI’s Frans Scheepers and State Street Investment Management’s Marcel Benjamin explore how indexing works for leveraged loans and take a closer look at the S&P USD Select Leveraged Loan Index.
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Erin Real:
What’s the role of indices in the fast-growing leveraged loan market?
Hello there. I’m Erin Real from Asset TV, and joining me for a closer look at the S&P USD Select Leveraged Loan Index are Frans Scheepers, Head of Fixed Income, Currency and Commodities at S&P Dow Jones Indices, and Marcel Benjamin, Senior Fixed Income Strategist at State Street Investment Management. Frans, Marcel, thank you so much both for being here today.
We’re going to jump right in and start with you, Frans. So, your team built and manages the S&P USD Select Leveraged Loan Index. Can you expand on the index background and how it’s constructed?
Frans Scheepers:
Oh yes, happy to dive in. In 2024, we partnered with UBS to take over what was the Credit Suisse Leveraged Loan Indices to combine what was our iBoxx Leveraged Loan Indices in one comprehensive family of more than 2,000 indices, capturing more than USD 1.6 trillion in market cap. These indices have the best-in-class data inputs, and with S&P Global, we’re in a great position due to the many offerings we have across various products such as Wall Street Office (WSO), ClearPar and other services with the data that fuels for pricing and reference data.
Now, to specifically talk about the S&P USD Select Leveraged Loan Index. For this index, which is a subset, a curated subset, of the broad USD leveraged loans market, we are focused specifically on liquidity. It has a floor, a minimum loan size of USD 500 million. When we include indices, we have an observation period of three months. We only include loans that had a liquidity score, from our Market Intelligence division, of more than two or better for the trading days, 50% of the trading days, over the last three months. In addition, we also control for diversification and concentration by capping the loans at 2%, issuers at 5% and the industries at 15%.
Erin Real:
Frans, can you talk about the broader ecosystem of loan index products supported by S&P DJI indices?
Frans Scheepers:
Yes, totally. At S&P Dow Jones Indices, we’ve long fostered liquid index products and ecosystems of products on our index intellectual property (IP). For example, U.S. equities, credit, commodities. Loans are no different. For loans, we have some of the largest ETFs, actively managed ETFs, in the market benchmarked to our iBoxx, or now called, S&P UBS Liquid Leveraged Loan Index. This index is also widely traded by the sell side for total return swap exposure. Everyone trades the same contract on the same trading documentation, meaning it’s fungible, and these contracts have traded more than USD 30 billion in 2024 and are on track to trade well more than that in 2025. In addition to that, the new S&P USD Select Leveraged Loan Index will help expand that ecosystem of products and support new product creation.
Erin Real:
Marcel, turning to you now, historically, how have market participants used leveraged loans?
Marcel Benjamin:
Investors in the market have incorporated leveraged loans into their portfolios because of their high income potential, historically, and that’s been a key driving decision for why we’ve seen increased adoption of that exposure. In addition, loans have near-zero correlation to traditional core bond strategies. That allows them to potentially have higher risk-adjusted returns and lower drawdowns by adding them in their portfolios. On top of that, loans are typically senior and secured in the capital structure. That may make them more resilient during times of stress, especially as compared to unsecured bonds.
Erin Real:
How have leveraged loans held up during times of volatility, and how is that different from fixed-rate bonds?
Marcel Benjamin:
It’s a great question. First of all, we’ve seen a tremendous amount of volatility in the last few years coming from the traditional duration, or interest-rate sensitivity, that bonds can introduce into a portfolio. 2022 was a really good example of that, when aggregate bond-type exposures were down double digits. Loans actually had a really good year. Loan indices were down maybe only 1% during that year. One of the reasons for that is that loans are floating-rate instruments. They are not fixed-rate debt instruments. When you think about comparing yield per unit of volatility for loans, they really stood out on that metric over the last few years.
Erin Real:
Why did the ETF wrapper make the most sense for State Street’s leveraged loan strategy?
Marcel Benjamin:
The ETF allows for quick and efficient access to many asset classes, but loans are one that, in particular, can be difficult to access. ETFs have price transparency where they trade on an exchange all day. In addition, there is holdings transparency. We publish the holdings of all of our ETFs on our website every day. State Street Investment Management manages near USD 800 billion of index fixed income exposures, and we have over USD 170 billion of bond ETFs. With respect to our expertise in the below investment grade corporate market, we’re managing over USD 45 billion.
Erin Real:
Thank you both for your time and your considerable insight. We really appreciate it.
To learn more about the S&P USD Select Leveraged Loan Index, including the latest research and data, visit the link below.
spglobal.com/spdji/fixed-income
