ETFdb Logo
  • ETF Database
  • Channels
    • Themes
      • Active ETF
      • Alternatives Channel
      • Artificial Intelligence
      • China Insights
      • Climate Insights
      • Core Strategies
      • Crypto
      • Disruptive Technology
      • Energy Infrastructure
      • ETF Building Blocks
      • ETF Education
      • ETF Investing
      • ETF Strategist
      • Faith-Based Investing
      • Financial Literacy
      • Fixed Income
      • Free Cash Flow
      • Innovative ETFs
      • Invest Beyond Cash
      • Leveraged & Inverse
      • Modern Alpha
      • Portfolio Strategies
      • Tax Efficient Income
    • Asset Class
      • Equity
        • U.S. Equity
        • Int'l Developed
        • Emerging Market Equities
      • Alternatives
        • Gold/Silver/Critical Materials
        • Crypytocurrency
        • Currency
        • Volatility
      • Fixed Income
        • Investment Grade Corporates
        • US Treasuries & TIPS
        • High Yield Corporates
        • Int'l Fixed Income
    • ETF Ecosystem
    • ETFs in Canada
    • Market Outlook
    • Crypto ETF Hub
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Database Categories
    • Indexes
    • Scenario Analysis
    • Watchlists
    • Head-To-Head ETF Comparison Tool
    • Mutual Fund To ETF Converter
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • Gaining Perspective Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Beyond Basic Beta Channel
  2. CLOs: An Institutional Strategy for the Masses
Beyond Basic Beta Channel
Share

CLOs: An Institutional Strategy for the Masses

Karrie GordonJul 25, 2023
2023-07-25

ETFs continue to open up avenues of opportunity for individual investors by capturing institutional investor strategies in an easily, widely accessible wrapper. One such strategy, that of collateralized loan obligations (CLOs), offers investors attractive income and yield with lower default risk.

In a panel on CLOs moderated by Tom Lydon, vice chairman of VettaFi, at the VettaFi Fixed Income Symposium, Danielle Gilbert of Panagram and Fran Rodilosso of VanEck explained the institutional strategy as well as the benefits for investors.

The Basics of CLOs

Attendees were asked about how they’re planning to balance duration and credit risk in the next 12 months. 57% of respondents indicated that they planned to take on more duration and less credit risk.

A great way to do that is through collateralized loan obligations (CLOs). But what exactly are CLOs? Danielle Gilbert, managing director at Panagram, drilled down into the basics of the institutional strategy that makes up a $1 trillion market.

“These are floating-rate bonds that derive their value from a pool of senior secured loans,” Gilbert explained. The underlying bonds have ratings anywhere from AAA to BB and are highly diversified. Pools constitute anywhere from 150-300 individual loans across a range of industries, with mechanisms in place to prevent single-sector concentration.

Payments are structured in what’s called a “waterfall” so that AAA-rated loans are paid first and BB loans last. The historical recovery rate is 70 for these loans, although that could dip in the current environment. Gilbert was quick to remind investors that these loans are senior loans that sit at the very top of a corporation’s balance sheet.

CLOs are “a good place to be in the current environment,” said Gilbert. “The fact that these are floating-rate and you have that additional credit spread — it’s really earning a very attractive income wherever you are up and down that corporate capital structure.”

Fran Rodilosso, head of fixed income ETF portfolio management at VanEck, also noted the collateralizations of CLOs as one of their most foundational and attractive qualities.


Content continues below advertisement

Understanding CLO Risk

Rodilosso noted that one of the foundational aspects of CLOs is the collateralization.

“These are large, liquid loans, usually from fairly well-known borrowers. They are very analyzable,” Rodilosso explained. It’s this transparency and ability to analyze the underlying loans that make them significantly less risky than past iterations.

The loans are also actively managed. It’s a key difference from collateralized debt obligations (CDOs), which collapsed spectacularly and led to the Great Financial Crisis. Whereas CDOs comprised a pool of thousands of loans, CLOs are made up of a few hundred with active oversight. CLOs have also become a high-quality investment option, particularly in recent years. They’ve been around for nearly three decades and continue to have safety mechanisms and oversight built into them

When it comes to default risk and default rates, CLOs historically hold very small default risk. Between 1996-2021, the S&P-rated AAA tranches, comprised of more than 6,000 tranches, yielded zero defaults.

Image source: VanEck
Image source: VanEck

Yield Opportunities Abound This Year

Because of their floating-rate nature, CLOs benefited from rising rates this year. “I think it’s an incredible opportunity to get active income yield without reaching for credit risk,” said Gilbert.

But how does the yield of a CLO stack up right now against investment-grade corporate bonds? Turns out, pretty spectacularly.

“An AAA CLO tranche today has a yield pickup over BBB investment-grade corporate bond,” Rodilosso explained. While investing in a CLO doesn’t add duration to a portfolio, it does add yield.

In an environment where interest rates are likely to remain high, CLOs offer a number of potential benefits to portfolios. The accessibility of the strategy through ETFs opens up CLOs to individual investors. What’s more, the benefits of ETFs and the inherent liquidity they provide mean that a number of institutional investors now access the strategy through ETFs.

“Core bond fixed income portfolios, the top 10 if you look at Morningstar… 60% are allocating to CLOs,” Gilbert explained. “Investors might already have access and not realize this, but what’s great about the ETF, as everybody knows here, is you have choice now.”

Panagram offers the Panagram BBB-B CLO ETF (CLOZ B+) and the Panagram AAA CLO ETF (CLOX A-) for investors seeking more targeted CLO tranche exposure. VanEck offers the VanEck CLO ETF (CLOI A). Briefly touched on was also the VanEck Fallen Angel High Yield Bond ETF (ANGL A-).

For more news, information, and analysis, visit the Beyond Basic Beta Channel.

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2025 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X