Where is VanEck looking this year? One major area for the busy ETF shop is collateralized loan obligations (CLOs) according to VanEck director of product management Bill Sokol, available in the VanEck CLO ETF (CLOI). Speaking at the ETF Exchange conference in Miami last week, Sokol spoke to the firm’s case for CLOs right now as well as SMID cap equities in another recently launched ETF, the VanEck Morningstar SMID Moat ETF (SMOT).
The ETF represents the firm’s first “truly” active fund with a subadvisor, a “unique arrangement” for VanEck, Sokol explained. The subadvisor, PineBridge Investments, brings decades of experience in CLOs and leveraged finance, he noted, adding that VanEck thinks CLOs are one of the best ideas in fixed income, which is already one of the big stories from 2023 so far.
“We didn’t think it made sense to do it passively, because every CLO is different and a deal-by-deal analysis is needed. For example, each CLO will have a different loan portfolio, a different manager, and they can have variations in the legal documentation,” Sokol said, pointing to the specialized knowledge required to model the cash flows and stress test the CLOs under various scenarios.
“That’s where PineBridge comes in. They’ve been doing this for years for institutional clients,” Sokol added. “You needed $100 million to have a separate account before, making it a true institutional-only market, but now anyone can access this asset class through an ETF.”
VanEck launched CLOI on June 21 last year, charging 40 basis points for its active approach to CLOs of any maturity, with 80% of its assets in investment-grade CLO bonds. CLOI does not invest in securities rated below BB- and can invest in foreign debt securities as well, combining a bottom-up analysis with a top-down overlay. CLOI has returned 5% over the last three months, picking up $15.4 million in net inflows over the last five days.
“If you’re looking for income, you should go where the yield is,” Sokol said. “CLOs are floating rate, so with all the Fed rate hikes last year, it means you’ve got very high coupons and high yields in CLOs versus other fixed income asset classes.”
CLOs also offer protection from deterioration of the loan portfolio, with significant insulation from defaults. As a result, investment-grade CLO default rates are near zero historically, Sokol explained.
Outside of CLOI, the firm also recently launched a SMID version of its VanEck Morningstar Wide Moat ETF (MOAT). The firm took note of the gap in valuations that emerged between small and large-cap stocks during last year’s rate hikes, prompting renewed interest in smaller firms given their tendency to outperform. SMOT launched in October.
“We worked with Morningstar to take that same approach used in MOAT and apply it to the small and mid-cap market,” Sokol said. “We think that it’s a space where there’s room to innovate because there’s a lot of small and mid-cap companies and not a lot of research coverage. It is one of those areas where you do see more active management and… the ability to add value by being selective — in this case, by applying the moat investment philosophy of investing in companies with a sustainable competitive advantage that are also attractively valued.”
SMOT tracks the Morningstar US Small-Mid Cap Moat Focus Index and charges a 49 basis point fee. The ETF has outperformed its ETF Database Category Average and its Factset Segment Average over the last three months, returning 16.8% compared to 7% and 11.4% respectively in that time. SMOT has added $26 million in net inflows over the last three months.
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