In an ever-changing financial landscape, investors are constantly exploring novel opportunities to optimize their returns and build wealth. Among the myriad of options, collateralized loan obligations (CLOs) have attracted the attention of savvy investors. These asset classes, often yielding higher returns than stocks and corporate bonds, are increasingly being incorporated into portfolios as investors seek to benefit from corporate loan repayments.
Historically, CLOs have been the domain of large institutional investors, but the rise of collateralized loan obligation exchange-traded funds (CLO ETFs) has made this sophisticated investment more accessible to a broader audience. The Janus Henderson AAA CLO ETF, a veteran in the space with nearly three years of operation and $3.7 billion in assets under management, is a prime example. Additionally, financial giants like VanEck and BlackRock have also ventured into the CLO ETF space, launching their own funds in 2022 and 2023 respectively. These funds, which boast a combined asset under management of $160 million, offer lucrative high yields.
Exploring the World of Collateralized Loan Obligation ETFs
As investors continue the quest for wealth creation, collateralized loan obligations (CLOs) have started to draw attention. These assets, which yield higher returns than most stocks and corporate bonds, reward investors when corporations make monthly loan payments. Over time, CLO tranches have performed well compared to some corporate debt categories.
The Rise of CLO ETFs
Exchange-traded funds (ETFs) for CLOs have gained momentum in recent years, offering a more accessible way for investors to venture into this sophisticated investment type. The Janus Henderson AAA CLO ETF (JAAA), one of the older ETFs at nearly three years, boasts $3.7 billion in assets under management. Other industry players such as VanEck and BlackRock have also launched their CLO ETFs, accruing a combined $160 million in assets and offering high yields.
Understanding the Risks
Despite their appeal, CLOs come with their fair share of risk, particularly those focused on non-investment-grade borrowers. Investing in less liquid funds with lower assets can also complicate the process of selling positions to access cash. While ETFs can aid in diversification and risk reduction, it’s crucial for investors to conduct thorough due diligence before jumping on investment trends.
The Nature of Collateralized Loan Obligations
CLOs have been a significant part of structured finance for nearly 30 years, linking global investors with companies in the leveraged finance and private credit markets. These assets provide investors with portfolio diversification, offering exposure to debt from more than 100 companies.
CLOs vs. CDOs
Collateralized debt obligations (CDOs), which played a notorious role in the 2008 recession, might ring a bell. However, CLOs differ significantly from CDOs. CLOs expose investors to leveraged loans paid by large corporations, while some CDOs depend on consumers to cover mortgage payments. CLOs, thus, have a lower credit risk and greater resilience in the face of economic uncertainties, thanks to their higher-quality borrowers.
Five CLO ETFs to Consider
There are several CLO ETFs, such as VanEck CLO ETF (CLOI), AXS First Priority CLO Bond ETF (AAA), Janus Henderson AAA CLO ETF (JAAA), Janus Henderson B-BBB CLO ETF (JBBB), and BlackRock AAA CLO ETF (CLOA), which offer exposure to diverse CLOs while minimizing risk. These funds house assets ranging from AAA-grade CLOs, regarded as the gold standard with minimal risk, to lower-rated CLOs that offer higher yields.
Takeaways
As investors venture into new territories such as CLOs, understanding the investment vehicle is key. While CLO ETFs can offer diversification, high yields, and reduced risk, they also come with potential downsides, making it essential for investors to do their homework. As the industry continues to evolve, keeping an eye on these investment trends will be crucial in navigating the investment landscape effectively.
