In sports, it’s often said that the best offense is a strong defense. That saying has relevance in financial markets, particularly in turbulent environments such as 2022. Not all exchange traded funds are up to the task of providing investors with defensive income and upside potential, but one that does answer that bell is the newly minted VanEck CLO ETF (NYSE Arca: CLOI). The actively managed CLOI debuted earlier this year and focuses on collateralized loan obligations (CLOs).
CLOs are fixed income assets. Alone, that status would be enough to scare investors at a time when interest rates are rising and aggregate bond benchmarks are slumping. However, the VanEck ETF warrants closer examination by income investors. With the potential for further widening in credit spreads, CLOI could be all the more relevant to income investors today.
“CLOs have outperformed most fixed income asset classes year to date, thanks to their floating nature and the increasing level of income generated as short-term rates continue to rise. Spread widening has created relative value opportunities in the space,” wrote Fran Rodilosso, VanEck head of fixed income ETF portfolio management.
CLOI, which debuted in June, is indeed defensively positioned. More than 85% of the ETF’s holdings are rated investment-grade, and the remainder aren’t yet rated, meaning the fund has no official exposure to junk debt. Of CLOI’s investment-grade components, all are graded AAA, AA, or A, indicating credit risk in this ETF is minimal.
As Rodilosso noted, credit spread widening is creating value opportunities in the CLO space, which CLOI can capitalize on because it’s actively managed. Additionally, more investors are evaluating the asset class for strong income/low credit risk traits.
“In addition, we believe CLOs will benefit from inflows to the asset class due to very good historical performance of the asset class in increasing default scenarios as well as the floating nature of CLOs. While spreads are at the widest levels of the year, spreads could widen a bit more from here prior to stabilizing. As a result, we continue to shift portfolios higher in the capital stack while adding value via disciplined security selection,” Rodilosso said in the note.
CLOI posted a modest gain in the final month of the third quarter and notably outpaced its benchmark — the J.P. Morgan CLO Index. The ETF has a spread duration of 4.84 years and a 30-day SEC yield north of 5%, according to issuer data.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
