Looking for a way to diversify your fixed-income portfolio toolset? Collateralized loan obligations, or CLOs, could provide attractive yields relative to similarly-rated bonds and loans. CLOs also provide strong risk protection and offer a floating rate coupon that increases as rates rise.
In the upcoming webcast, Rise Above Rising Rates with CLOs and FRNs, Bill Sokol, director of ETF product management at VanEck, and Fran Rodilosso, head of fixed income ETF portfolio management at VanEck, will outline the current conditions and how CLO investments are a good fit for an investment portfolio in today’s market.
For example, the recently launched VanEck CLO ETF (CLOI) can help investors better manage risks while seeking alternative income sources.
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.
Additionally, the VanEck Vectors Investment Grade Floating Rate (NYSEArca: FLTR) may act as an alternative to traditional cash instruments. The fund provides exposure to the MVIS US Investment Grade Floating Rate Index. The underlying index is comprised of floating rate notes, which have variable coupons that reset periodically, and is mainly made up of a non-leveraged portfolio of investment grade floating rate corporate bonds. These floating rate notes may offer higher yields than other short-duration instruments.
In a shifting interest rate environment, with the Federal Reserve taking on a tighter monetary policy, fixed income ETF investors have to adapt to the changing market and look beyond the potential shortcomings of traditional bond benchmarks.
“Yields on floating rate notes provide an attractive yield per unit of duration, compared to short-term bonds. Floating rate note coupons reset quarterly, adjusting automatically with rates and maintaining a near-zero duration profile,” according to VanEck.
Financial advisors who are interested in learning more about CLOs and FRNs can register for the Tuesday, November 1 webcast here.