How CLOs Can Buffer Bond Portfolios | ETF Trends

Broader bond benchmarks are performing far better in 2023 than they did last year. While that’s certainly a positive, the fixed income environment isn’t entirely sanguine, either. After all, the Federal Reserve could surprise with more and/or higher interest rate increases in the back half of the year.

In simple terms, it’s always better to be prepared than to arrive at the right place too late. The VanEck CLO ETF (NYSE Arca: CLOI) can offer advisors and investors an avenue for thriving in an unpredictable fixed income landscape while accessing compelling income.

That exchange traded fund was highlighted today on VanEck’s webinar “Prepare Your Income Portfolio for Uncertainty Ahead.” The webcast started at 11:00 AM Eastern time. In it, VanEck head of fixed income ETF portfolio management Fran Rodilosso and William Sokol, director of product management, highlighted the advantages of collateralized loan obligations (CLOs). That’s the asset class to which CLOI provides exposure.

Survive and Thrive With CLOs

CLOs are actively managed assets, indicating that it’s appropriate that CLOI is an actively managed fund. That could be a crucial trait at a time when many advisors are looking to balance interest rate risk while delivering adequate income within client portfolios.

“Many fixed income asset classes are once again providing substantial yields following the significant move upwards in rates over the past year—but market conditions are volatile,” noted VanEck.

When it comes to income, there’s no denying CLOI delivers the goods. The $103.47 million exchange traded fund, which is 13 months old, sports a 30-day SEC yield of 6.34%. At first glance, market participants unfamiliar with CLOs may be apt to assume that a tempting yield like that comes with a trade-off in the form of elevated credit risk. That’s not the case with CLOI. 94.1% of its holdings are rated AAA, AA, or A, and the other 5.9% aren’t rated.

On the other hand, some investors might assume that CLOI’s big yield comes with significant interest rate risk. However, that’s not the case, either. CLOs have floating-rate components, making these bonds less sensitive to changes in interest rates. For its part, CLOI’s spread duration is just 2.4 years.

Advisors who would like to listen to a replay of the VanEck webinar can register here.

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