VettaFi’s vice chairman Tom Lydon discussed the VanEck CLO ETF (CLOI) on this week’s “ETF of the Week” podcast with Chuck Jaffe of “Money Life.” With rates continuing to rise and inflation still in the water, a rising rate environment is likely to persist.
CLOI provides investors with exposure to an actively managed collateralized loan obligation fund. Lydon noted that “this is an asset class that the average investor really doesn’t have access to. In fact, traditionally, the average financial advisor didn’t have access to it either — it was mostly just for institutions.”
A CLO is a security backed by a pool of debt. They are often backed by corporate loans with low credit ratings, frequently taken out by private equity firms for leveraged buyouts. Essentially, Jaffe noted, “these are securitized loans that have priority.” Because of this priority and because CLOI is actively managed, it is positioned to be less effected by defaults, which in turn helps it generate more yield.
Lydon said, “a great thing here is VanEck saw this opportunity when you look at the fixed income landscape, where there was a gap. It wasn’t well served with ETFs.” VanEck found an ideal partner in Pinebridge. According to Lydon, “Pinebridge manages 60 billion dollars, and they specialize in CLOs.” Pinebridge finds opportunities in lower-rated debt. Lydon observed that CLOs have historically low defaults rates. “If you can go with a lower-quality, higher-yielding rating in one of these traunches, you can produce a higher yield and higher total return.”
CLOI has a yield of 3.63%, which Lydon sees as something investors should clearly take, especially since they can get that yield with some degree of safety. This is especially critical given what’s happening in the equity markets these days.
With the 60/40 portfolio being challenged this year, CLOI fits nicely into the fixed income sleeve. There is growing confidence in the market side, given Fed transparency. Lydon observed that the first quarter of the year saw outflows in fixed income space, but the second quarter and third quarter have, so far, seen healthy inflows.
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