CLOs: Lower Duration Risk and Pick Up Yield | ETF Trends

With higher relative yields, a history of strong risk-adjusted returns, and protection against rising rates, there is a strong case for a strategic allocation to collateralized loan obligations (CLOs) within an income portfolio.

In the upcoming webcast, CLOs: Lower Duration Risk and Pick Up Yield, Fran Rodilosso, head of fixed income ETF portfolio management at VanEck; William Sokol, director of ETF product management at VanEck; and Laila Kollmorgen, portfolio manager, CLO Tranche at PineBridge Investments, will engage in a discussion about the current market environment, how to approach CLO investing, and how CLOs can fit into a portfolio.

Over the long term, CLOs have historically performed well relative to other corporate debt categories, particularly when a broad investment grade approach is taken. CLOs are also structured to help mitigate risk, with subordination to absorb losses and other built-in protections. Furthermore, CLOs are floating rate instruments, which we believe makes them an attractive alternative in a rising rate environment, according to VanEck.

VanEck recently launched the VanEck CLO ETF (CLOI) to help investors better manage risks while seeking alternative income sources.

“Over the long term, collateralized loan obligation (CLO) tranches have historically performed well relative to other corporate debt categories, including leveraged loans, high yield bonds, and investment grade bonds, and have significantly outperformed at lower rating tiers,” according to VanEck.

The actively managed CLOI came to market in June and focuses on collateralized loan obligations (CLOs). CLOI is sub-advised by PineBridge Investments and emphasizes investment-grade CLOs, indicating that credit risk is kept in check. Minimizing risk comes with the territory with CLOs, suggesting that CLOI could be an idea for conservative income investors.

Typically in the fixed income space, lower risk means lower upside potential. That’s the usual trade-off, but with CLOs, things can be different. In fact, the asset class has a track record of beating other corners of the bond market, including some high-yield fare.

“CLOs are structured to help mitigate risk, through the strength of their underlying collateral as well as built-in traits such as coverage tests to correct collateral deterioration. This has historically helped them experience significantly lower levels of principal loss when compared with corporate debt and other securitized products. This has resulted in a track record of strong risk-adjusted returns versus other fixed income asset classes, particularly among investment grade rated CLO tranches,” according to VanEck.

Financial advisors who are interested in learning more about CLOs can register for the Tuesday, August 2 webcast here.