Before the advent of the exchange-traded fund (ETF), investing in collateralized loan obligations (CLOs) was limited to insurance companies, pension funds, sovereign wealth funds, and other institutional investors. In recent years, however, ETFs have significantly expanded access to CLOs.
Below are three ways that ETFs have “democratized” access to CLOs.
1. Simplified Transactions
By investing in a CLO ETF an investor can get exposure to CLOs which trade over-the-counter (OTC), in a relatively simplified process via their brokerage account. The ETF’s investment adviser navigates the CLO market and executes the transactions with specialized bond desks.
The ETF market means investors have access to CLOs via regulated exchanges in the NYSE and NASDAQ. Similar to the ease of trading stocks, investors now can buy or sell ETFs that invest in AAA-rated CLO tranches intraday in their brokerage account.
2. Democratized Access
As mentioned, access to the CLO market was once restricted to the institutional investors due to million dollar minimum trade sizes, but the advent of ETFs changed all that.
ETFs democratized access, allowing investors to participate in the CLO market with fractional ownership. Retail investors can get exposure to the various levels of CLO tranches based on the price per share of the ETF. This opens up a whole new asset class for investors looking to diversify their income sources or obtain a hedge against rising interest rates due to the floating-rate features of CLOs.
Again, investors reap the benefits of CLOs without committing millions in capital.
3. Managing Complexity
The structure of CLOs come with their own unique set of complexities. They carry cash flow waterfalls, overcollateralization tests, and reinvestment periods that require deep credit expertise. Reckoner has that expertise and evaluates those complexities as manager of the ETF so the investor does not have to.
ETFs, especially those that are actively managed, eliminate these complexities for existing and prospective investors. Most investors don’t have the time nor patience to analyze the CLO market from top to bottom and vice versa to find the best opportunities. Reckoner has that expertise and evaluates those complexities as manager of the ETF so the investor does not have to. As the ETFs active investment manager, Reckoner can perform the due diligence, find top-quality tranches for investment, monitor the fund’s performance, and make adjustments as necessary.
Given these benefits, where can investors access the capabilities of active ETF managers to get exposure to CLOs?
Six Options to Consider
With inherent benefits such as liquidity, lower entry costs, trading flexibility, and others, ETFs have allowed investors to include CLOs as part of their modern income portfolio. With that, here are six options to consider from Reckoner:
- Reckoner Yield Enhanced AAA CLO ETF (RAAA): targeted to those looking to diversify their monthly income with CLO exposure to top-tier AAA credit.
- Reckoner Yield Enhanced AAA CLO Reinvesting ETF (RAAR): provides leveraged exposure to AAA-rated CLO bonds seeking compounding value through distribution minimization and continuous reinvestment.
- Reckoner Yield Enhanced AAA CLO Annual ETF (RAAY): provides leveraged exposure to AAA-rated CLOs while limiting distributions to a single annual payment.
- Reckoner BBB-B CLO ETF (RCLO): targeted to those looking to diversify their monthly income with CLO exposure to BBB- to B-rated credit.
- Reckoner BBB-B CLO Reinvesting ETF (RCLR): provides exposure to primarily BBB- and BB-rated CLO bonds seeking compounding value through distribution minimization and continuous reinvestment.
- Reckoner BBB-B CLO Annual ETF (RCLY): provides exposure to primarily BBB- and BB-rated CLO bonds while limiting distributions to a single annual payment.
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Important Information
Carefully consider the fund’s objectives, risks, charges, and expenses before investing. The prospectus at each of the links above provides the full details. Read it carefully before investing. Investing involves risk including the risk of principal loss.
Each of the fund’s above have various principal investment risks which may 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.
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.
