Exchange traded funds tracking collateralized loan obligations (CLO) might be on the receiving end of more attention and assets as market participants scour the fixed income universe for lower-risk, high-yield opportunities.
That could be a positive for the VanEck CLO ETF (CLOI). The actively managed CLOI, which turns two years old in June, sports a 30-day SEC yield of 6.58%, confirming its robust income traits. CLO ETFs, including CLOI, could also be at the right place at the right as Bank of America initiated coverage of this corner of the fixed income ETF space Tuesday, citing an array of compelling factors.
Those include attractive valuations, CLOs’ quality traits, the diversification potential offered by the asset class, returns that often match or top Treasurys over the long term, and the point that many standard fixed income benchmarks are lightly allocated to CLOs.
‘Prudent Yield’ Available With CLOI
As noted above, CLOI sports a tempting yield. However, the ETF’s big income doesn’t imply elevated risk. In fact, CLOI and its brethren are arguably conservative avenues for generating above-average yields on fixed income assets. The risk associated with ETFs such as CLOI is further mitigated by the point that many CLOs carry floating rate note components.
“Collateralized loan obligations (CLOs) are a perfect example of Prudent Yield. CLO ETF yields range from 6-9% depending on credit quality, well above 4-5% yield in traditional fixed income products,” noted Bank of America. “CLOs hold floating-rate loans which has bolstered performance in a higher-for-longer rates backdrop. Despite yields near decade highs, CLOs still look cheap relative to corporate bond indices.”
For many bond investors, CLOs once appeared too complicated and inaccessible, but ETFs such as CLOI have democratized the space and that’s a positive because CLOs can be accretive to broad fixed income portfolios over lengthy holding periods.
“CLOs let investors pick their credit risk. AAA-rated CLOs have returned nearly 3% per year since 2007, on par with long-term US Treasury bonds, with much lower volatility,” added Bank of America. “BB-rated CLO tranches have returned close to 12% per year, outperforming the S&P 500 over the same period.”
The $295 million CLOI allocates about two-thirds of its weight to CLOs rated AAA, AA, or A, indicating the VanEck ETF could be a credible, higher-yielding alternative to Treasurys while offering investors superior return potential relative to U.S. government debt. CLOI “offers the most diverse exposure across tranches,” according to Bank of America.
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