Whenever a crisis hits, opportunity can arise. When the banking crisis potentially put the stability of the U.S. financial system in question during Q1, opportunities in collateralized loan obligations (CLO) were a byproduct.
Data from S&P Global Market Intelligence noted that bank holding companies had “$166.14 billion in collateralized loan obligations (CLOs) in the period, compared with $165.04 billion a quarter earlier and $156.17 billion a year earlier.” The trend has been rising higher, particularly after the COVID-19 pandemic hit in 2020.
CLOs consist of a pool of debt as opposed to a single loan obligation, allowing for the creation of tranches that segment the pools into investable securities. In turn, the investment capital can then help create additional loans.
Given the rise in CLOs in recent years, one fund to consider is the Invesco AAA CLO Floating Rate Note ETF (ICLO). ICLO offers exchange traded fund (ETF) investors an actively managed option, putting the portfolio management in the hands of market professionals — an essential component when dealing with an intricate CLO market.
ICLO seeks to achieve its investment objective by investing the majority of its net assets in floating-rate note securities issued by CLOs. The fund adds a dose of quality by only investing in CLOs that are rated AAA or equivalent by nationally recognized statistical rating organizations (NRSROs).
ICLO Reaches for More Yield
In the current fixed income environment where the U.S. Federal Reserve could continue to push rates higher if economic data warrants more hawkishness, reaching for more yield is ideal. Allocating to high yielding assets is essentially a foot race to outpace rate hikes, which ICLO can offer with its focus on CLOs.
If fixed income investors want to run that race, then ICLO offers a compelling option. The 30-day SEC yield is 6.56% (as of July 14), while its distribution rate is is 7.93%, which should appeal to fixed income investors seeking monthly payouts.
As mentioned, getting active management is imperative, given the intricacies of investing in the CLO market. Additionally, the fund is also offering a cost-effective kicker, which is an added bonus given the high-inflation times of the current economic environment.
“Effective Jun. 28, 2023 through Dec. 31, 2023, Invesco Capital Management LLC (the “Adviser”) will voluntarily waive 100% of its management fee, 0.26%, for the Fund,” Invesco noted in the fund’s product website.
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