How index strategies can be an effective vehicle for loan market exposure
Leveraged loans are traditionally an institutionally-invested asset class, but adoption via mutual funds has been increasing. Loans largely remain an actively-managed corner of the market, with limited index investing options.1 However, given the growth of the market, advancements in trading technology, and deeper trading markets, it is now possible for investors to gain representative beta exposure to loans via a cost-effective, diversified, index-based ETF.
LVLN’s index was designed to provide leveraged loan exposure that closely aligns with the performance contour of the asset class. Furthermore, LVLN is structured to manage and mitigate various complexities in leveraged loan trading that can increase costs. In this piece, we explain why indexed loan exposure is are now available to investors, and outline some of the structural techniques that we employ to give investors the lowest-cost option2 for leveraged loan beta.
Cracking open the market
Given the significant growth of the asset class—it’s now on par with the size of the high yield bond market (Figure 1)—tapping into leveraged loans is a massive opportunity for investors. With loans, investors can benefit from a fixed income asset class that combines minimal duration risk with attractive all-in yields. The growth of the asset class itself has opened trading markets, increased the number of potential trading partners, and amplified liquidity, broadly.
Hurdles to investing in leveraged loans have existed for decades, making index-based approaches more challenging to implement. These hurdles include high transaction costs, thin liquidity at times, inconsistent accessibility, opaque pricing, and protracted settlement times.
As the market structure (depth, breadth) for loans has continued to evolve and the asset class has expanded in both size and adoption by investors, many of these challenges have become more manageable. Advancements that help dismantle historic barriers to loan index strategies include:
Increased trading volume: Growth in and investor demand for the asset class has increased trading, with electronic trading market share rising from below 1% in early 2024 to over 6% by mid-2025,3 which puts downward pressure on transaction costs and increases the velocity of trading in more mid-sized names.
Improved trading technology and insight: Price frequency and transparency has improved, with more quotes and platforms facilitating the increased buyer and seller activity.
Electronic trading: Relationships with counterparties include portfolio trading in loans, where lists of loans may be traded at once, enabling greater liquidity and transparency.
In short, the challenges that once restricted loans from being sampled — and thereby indexed — are no longer insurmountable.
Insightful process
Specific elements of the investment process can make indexing an effective and viable approach for managing and tracking leveraged loan exposures.
The importance of sampling
Fixed income index managers in some cases employ sampling – a process by which the key risk characteristics of the benchmark are replicated without holding every issue in the benchmark. By aligning on areas like duration, yield, quality, and sector, sampling builds portfolios that represent the indices while mitigating the costs that would be incurred by holding every benchmark issue.
More illiquid parts of the market, like leveraged loans, can be harder to sample, but these challenges can be mitigated by index managers with the size, skill, and expertise to build portfolios with tightly-controlled outcomes in credit. For sampling in loans, the most important elements to ensure close performance tracking of the index are flexibility and optionality in selecting the underlying exposures. Alignment to those key risk characteristics will keep performance relatively close to that of the index.
In addition, the increased flexibility in choosing what to buy will reduce transaction costs by including the dimensions of liquidity and loan availability in security selection.
Finding the right benchmark
While loan market liquidity has improved, it remains challenged, as many institutional investors hold loans until maturity. This is particularly true of smaller loans, which tend to be held (and not traded) by banks or private credit investors. Therefore, it is important to choose an index that is both representative of the exposure investors seek and investable to a cross-section of investors.
The S&P USD Select Leveraged Loan Index, the benchmark for LVLN, has the following characteristics:
- Minimum $500 million+ in par amount. The reality is that the platforms for leveraged loan investment—including mutual funds, SMAs, or ETFs—typically have 0 to minimal allocation to small/middle market company loans. Investors in mutual funds, SMAs or ETFs—even institutional investors with strong market standing, are often only exposed to larger loans which trade daily and offer a considerable degree of price transparency (i.e., those loans found in the broadly syndicated loan market). Therefore, using the S&P USD Select Index benchmark helps ensure a broader exposure to loan beta.
- Broad diversification by issuer and industry. The index aims to be a representation of the broad US leveraged loan market (Figure 2), with limits on issue, issuer, and sector to deliver a wide cross-section of industries and a liquidity/depth score that meets the standards set by the index provider.
- Monthly rebalance. Monthly reconstitution—as opposed to weekly—helps to lower turnover and trading costs.
Figure 2: The chosen LVLN benchmark represents the broad investable leveraged loan universe
The bottom line
Advancements in trading have increased the depth and breadth of loans markets. Therefore, leveraged loans are poised to be more accessible to index-focused investors, similar to other complex betas such as high-yield and emerging market debt.
By following the same overarching process we have successfully employed in these other complex asset classes, and by maintaining awareness of the intricacies of the loans asset class, we believe we can deliver an efficient, transparent, index-based exposure at an attractive price point relative to incumbent peers. We look forward to discussing how our leveraged loan indexing process can help you to meet your investment goals.
Learn more
If you’d like to learn more about our leveraged loan capabilities, please contact your sales representative.