Investors Can Access CLOs With This New ETF | ETF Trends

Collateralized loan obligations can give investors fixed income opportunities if they’re willing to accept the risk. CLOs gained notoriety during the financial crisis in 2008, but given their recent history, they might not be as risky as one might suspect–enter the AAF First Priority CLO Bond ETF.

CLO is an actively-managed ETF that pursues its investment objective by investing in AAA-rated first priority debt tranches of U.S. dollar-dominated CLOs.

“The AAF First Priority CLO Bond ETF begins trading on the New York Stock Exchange under the ticker AAA on Wednesday,” a Bloomberg article said. “The fund tracks the highest-rated CLOs and is actively managed, according to Alternative Access Funds co-founder Peter Coppa, who previously worked as a money manager at Marathon Asset Management. While many loan ETFs exist, AAA is the first focused on CLOs to debut.CLOs, which package and sell leveraged loans into chunks of varying risk and return, have drawn scrutiny in recent months after the coronavirus pandemic ignited a wave of corporate distress.”

“Veterans of the $4.7 trillion ETF industry have warned that packaging the loans into funds that are easily accessible could pose a risk to retail investors unfamiliar with the $700 billion CLO-market,” the article added further. “But the industry’s performance through the 2008 financial crisis and the virus outbreak shows that it’s appropriate to offer CLOs in an ETF, Coppa said.”

“These particular bonds have maintained their AAA rating through a variety of market selloffs, and we think that’s a testimony to it being a good product and reasonable for retail investors to have access,” Coppa said in a phone interview.

With the demand for mortgages up, ETF investors can take a look at the VanEck Vectors Mortgage REIT Income ETF (MORT). MORT seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Mortgage REITs Index.

MORT normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The Mortgage REITs Index may include small-, medium- and large-capitalization companies.

Another fund to look at is the FlexShares Disciplined Duration MBS Index Fund (MBSD). MBSD seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the ICE BofA Merrill Lynch, Constrained Duration US Mortgage Backed Securities IndexSM.

The underlying index reflects the performance of a selection of investment-grade U.S. agency residential mortgage-backed pass-through securities. The fund generally will invest under normal circumstances at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of the underlying index and in “TBA Transactions” that represent securities in the underlying index.

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