The announcement of a new U.S. Federal Reserve chairman has introduced additional uncertainty to the markets, particularly within the fixed income sector. To address potential income risk, investors may want to consider diversifying their portfolios with collateralized loan obligations (CLOs).
President Donald Trump has nominated Kevin Warsh to succeed Jerome Powell as Fed chair, with Powell’s term ending in May. Anticipation prior to the appointment suggested that President Trump might select a chair more inclined toward interest rate cuts. However, Warsh’s reputation for hawkishness in combating inflation challenges this expectation, casting doubt on the likelihood of imminent rate reductions. As a result, the outlook for fixed income markets is likely to remain uncertain.
Instead of relying solely on traditional income sources such as bonds, fixed income investors can broaden their exposure with CLOs. These securities are backed by diversified pools of secured corporate loans structured in various tranches, providing opportunities for attractive yields and enhanced risk management, thanks to historically low default rates—particularly in AAA- or investment-grade-rated tranches.
Furthermore, with the Federal Reserve’s future rate policy unclear, CLOs offer floating-rate features. This allows fixed income investors to benefit from yield flexibility, whether the Fed is cutting or raising rates, making CLOs a compelling option in a shifting interest rate environment.
2 ETF Options
Access to the CLO market was previously restricted to institutional investors. However, ETFs provide retail investors with an convenient access to this unique market. With flexibility, tax efficiency, cost-efficiency, and other benefits, ETFs have increasingly become the investment vehicle of choice.
Reckoner Capital currently has two core CLO strategies available as an ETF—the Reckoner Yield Enhanced AAA CLO ETF (RAAA) and the Reckoner BBB-B CLO ETF (RCLO). These actively managed funds give Reckoner Capital’s portfolio managers the autonomy to adjust the holdings as necessary to suit current market conditions. That flexibility can benefit fixed income investors in the current environment, one fraught with the uncertainty of a new Fed chair as well as other market factors. Furthermore, both funds tap into the experience of the funds’ portfolio managers who know how to navigate a CLO market that carries its own unique set of complexities and idiosyncratic risks.
RAAA invests primarily in CLO debt tranches rated AAA, the highest level of investment-grade and the most senior tranche in the structure. The Fund seeks to finance a portion of the portfolio at advantageous rates to enhance its yield potential. As of January 31st, it carries an SEC yield of 5.53%, according to Morningstar data. For investors who are willing to accept higher credit risk in exchange for greater yield potential, RCLO invests in tranches rated between BBB+ and BB-, while, as of the same period, it carried a SEC yield of 7.13% according to Morningstar. The gross expense ratio for RAAA is 0.30%, and for RCLO, it is 0.50%.
These ETFs can complement a current fixed income portfolio, allowing investors to carve out a sleeve specifically for CLO exposure. As mentioned, we believe it’s an opportune time to expand fixed income sources. CLOs are one way to achieve that diversification.
For more information on RAAA, click here, and for additional information on RCLO, click here.
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Important Information
Carefully consider the fund’s objectives, risks, charges, and expenses before investing. The prospectus at www.reckoner.com/raaa or www,reckoner.com/rclo or 212.597.2500 provides the full details. Read it carefully before investing.
Investing involves risk, including the risk of principal loss. The fund’s principal investment risks include management risk, novel structure risk, affiliated fund risk, collateralized loan obligation risk, non-diversified fund risk, new fund risk, leverage risk, and liquidity risk. For additional information about these and other fund risks, please refer to the “Principal Investment Risks” section of the prospectus.
ETFs may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market prices (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.
Past performance is no guarantee of future results.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For RAAA standardized performance, please click here www.reckoner.com/raaa. For RCLO standardized performance, please click here www.reckoner.com/rclo.
Collateralized Loan Obligations (“CLOs”) are structured products that issue different tranches, with varying degrees of risk, which are backed by an underlying portfolio consisting primarily of below investment grade corporate loans. Investments in CLOs presents risks similar to those of other credit investments, including interest rate risk, credit risk, liquidity risk, prepayment risk, and the risk of defaults of the underlying assets.
Distributor: Quasar Distributors, LLC.
