Several firms are planning to launch collateralized loan obligation (CLO) ETFs, enhancing options for investors.
CLOs have provided attractive risk-adjusted returns over the past decade, especially when compared to other fixed income investments. Noninstitutional investors did not have access to the asset class until recently with the introduction of CLO ETFs.
Virtus, BondBloxx, and Nuveen are plotting their entrance into the CLO ETF space, according to regulatory documents. The firms have filed to launch the Virtus Seix AAA Private Credit CLO ETF (PCLO), the BondBloxx Private Credit CLO ETF, and the Nuveen CLO ETF, respectively.
Palmer Square Capital last week launched the Palmer Square Credit Opportunities ETF (PSQO) and the Palmer Square CLO Senior Debt ETF (PSQA), bringing the firm’s CLO market expertise to investors in the familiar ETF wrapper.
See more: Palmer Square Leverages CLO Expertise for New ETFs
Other funds in the space include the $12.1 billion Janus Henderson AAA CLO ETF (JAAA ), the $1 billion Janus Henderson B-BBB CLO ETF (JBBB ), the $465 million BlackRock AAA CLO ETF (CLOA ), the $465 million Panagram BBB-B CLO ETF (CLOZ ), the $444 million VanEck CLO ETF (CLOI ), and the $161 million Invesco AAA CLO Floating Rate Note ETF (ICLO ).
Why CLO ETFs Are Attractive Investments
The asset class has been able to outperform other fixed income investments in recent years due to the structural features of CLOs and the CLO market.
First, CLOs are backed by a pool of leveraged loans, according to VanEck. They are noninvestment-grade, producing high levels of income to be distributed to CLO tranche investors.
Additionally, each tranche of a CLO has varying degrees of subordination. This may insulate investors from default losses. According to VanEck, the average CLO portfolio would need to experience default rates several multiples of the historical average, for five or more consecutive years, for the first dollar of loss even in BBB and BB rated tranches. AAA rated CLOs have never defaulted, according to VanEck.
Finally, even CLOs with the same rating are not identical to one another. This means extensive due diligence is required before investing, introducing a risk premium. Furthermore, each tranche has a unique investor base with different return targets, which can drive yields higher, according to VanEck.
For more information, please visit VettaFi.com | ETF Trends.
