Investors searching for yield in 2026 may have reached a crossroads. They can accept the duration and default risks associated with high-yield corporate bonds. Alternatively, they could pivot toward the structural seniority inherent in many collateralized loan obligations (CLOs).
CLO tranches rated BBB-B can provide a superior alternative to traditional high-yield corporates, which are untethered from changes in Fed rate decisions, given their floating-rate coupons and robust credit enhancements.
Structural Advantages of CLOs
High-yield corporates are typically comprised of unsecured debt obligations from a single company. If the company experiences financial distress, the retail bond investor typically sits at the bottom of the capital stack. Comparatively, BBB- through B-rated CLO tranches consist of a diversified pool of senior secured loans.
This differentiation highlights the structural seniority inherent in CLOs. If the underlying loan pool experiences defaults, cash flows from lower-rated equity tranches are diverted to pay senior debt holders first. This provides a buffer that corporate bonds simply don’t possess.
See More: 3 Ways ETFs Revolutionized Access to CLOs
As mentioned, CLOs are floating-rate instruments while high-yield corporates carry fixed coupons. In the current environment fraught with sticky inflation, fixed-rate bonds are susceptible to price depreciation if rates stay elevated. Alternatively, CLO coupons reset quarterly so yields move in tandem with benchmark rates. This effectively minimizes duration risk that can affect traditional bond portfolios.
The RCLO ETF Opportunity
For retail investors and advisors, accessing this sophisticated CLO market was once relegated to institutional investors. However, the Reckoner BBB-B CLO ETF (RCLO) democratizes this access for retail investors. The fund is specifically designed to provide exposure to this corner of the CLO market, which seeks to offer a higher yield premium over similarly rated corporate debt.
RCLO includes the following features:
- Active management: Compared to passive bond indexes, RCLO is actively managed by Reckoner Capital’s structured credit experts. Their experience allows them to navigate the nuances of the CLO market, while leveraging their expertise to focus on BB-rated tranches where they identify strong relative value.
- Enhanced yield potential: RCLO’s focus on BBB-B tranches which seek higher yields than senior AAA CLOs while maintaining significantly more structural seniority compared to high yield corporates.
- Liquidity and access: As mentioned, RCLO creates retail access to this corner of the CLO market through a liquid, flexible, and transparent ETF vehicle.
As credit spreads tighten in the current macroeconomic environment, RCLO should be considered for investors who want to outpace inflation in this higher-for-longer rate environment without taking on excessive corporate default risk.
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 each of the links above 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, collateralized loan obligation risk, non-diversified fund risk, new fund risk, and liquidity risk. For additional information about these and other fund risks, please refer to the “Principal Investment Risks” section of each prospectus.
ETFs may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market prices (not NAV). They 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.
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