The VanEck CLO ETF (CLOI) pioneered exposure to collateralized loan obligations (CLOs) via the ETF wrapper. That broadened access to an income-generating asset class that was the long the territory of professional investors.
CLOI, which turned two years old in June, is now a $565 million juggernaut. That confirms there’s validity in the CLO/ETF combination. There’s also room for new ETFs to carve out niches in the vast CLO realm. Enter the newly minted VanEck AA-BB CLO ETF (CLOB), which debuted last month. Like its established relative CLOI, CLOB is actively managed and subadvised by PineBridge Investments.
The rookie ETF could be paired with CLOI or used on a stand-alone basis by investors seeking more income in the CLO space. CLOI allocates more than 70% of its roster to CLOs rated AAA, AA or A. But CLOB has just half that exposure, with another 31% directed to CLOs with BBB or BB grades.
CLOB Has Income Benefits
Across the CLO ratings spectrums, these bonds, including CLOB and CLOI holdings, sport higher yields than other fixed income assets. However, that doesn’t imply significantly higher risk. Regarding the income advantages offered by CLOB, there’s a noticeable uptick in yield when moving out of the AAA CLO segment.
“This part of the CLO capital structure offers significantly higher spreads, driving greater yield and total return potential. The increase in yield is particularly acute moving from A to BBB rated CLOs,” noted William Sokol, VanEck product manager.
Of course, there’s a trade-off in that lower-rated CLOs can be more volatile than the AAA holdings residing in CLOI. That highlights potential benefits via CLOB’s active management. That management can take steps to mitigate some of that volatility.
Another positive attribute offered by CLOB is that the ETF could be a complement or alternative to traditional junk bond exposure. That’s because lower-rated CLOs are less rate-sensitive. They also have different issuer profiles than standard high-yield bonds.
“CLOB can provide diversification potential because of the floating rate nature of CLOs and the differences in underlying exposures. CLOs are backed by leveraged loans, which have different issuer and sector representation versus the high yield market,” added Sokol.
The new CLOB has an annual expense ratio of 0.45%.
Editor’s note: Advisors interested in learning more about CLOs and ETFs such as CLOB and CLOI can attend VettaFi’s Fixed Income Symposium on Oct. 24. VanEck’s William Sokol will be one of the guest speakers. Registration is available here.
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