On June 4, Franklin Templeton launched the Franklin BSP CLO ETF (YCLO), an actively managed fund with an expense ratio of 35 basis points. YCLO invests primarily in investment-grade CLOs, while maintaining diverse exposure across U.S. and European markets. The fund aims to generate income through CLO interest payments while actively navigating relative value opportunities across the structured credit market.
Flexibility Across the CLO Debt Stack
While the CLO ETF category has expanded rapidly in recent years, many offerings remain concentrated in a narrow segment of the market. Several of the largest funds focus primarily on AAA-rated CLO debt, emphasizing maximum credit quality but limiting flexibility elsewhere in the capital structure.
YCLO maintains a flexible investment approach, predominantly focusing on investment-grade CLO tranches while retaining the ability to allocate across various segments of the debt stack. The fund operates with a broad geographic mandate, distinguishing itself from many ETFs by investing in both U.S. and European markets to identify relative value across international regions. Additionally, by participating in both new issuances and secondary market debt, YCLO is positioned to capitalize on market opportunities when pricing deviates from underlying fundamentals.
Compelling Value in CLO Debt
While traditional bond investors spent much of 2022 and 2023 grappling with rising rates, CLO debt generally benefited from its floating-rate structure, as coupon payments increased alongside benchmark rates. The CLO market remains relatively inefficient compared to Treasury or investment-grade corporate bond markets, with thousands of individual securities of varying structures, creating an opportunity for security selection. Even as the Federal Reserve has begun easing policy, short-term rates remain elevated relative to pre-pandemic levels, leaving CLO debt capable of generating yields attractive to many traditional investment-grade bond sectors.
The introduction of YCLO represents the latest expansion of the firm’s robust fixed income ETF platform, which currently commands over $10 billion in total assets.
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