These fixed income assets have yields that top 5%. How to get the most out of them
As investors hunt for solid yields, many are turning to collateralized loan obligations. The products, which are pools of floating-rate loans to businesses, have seen an uptick in interest. A record $25.6 billion poured into bank loan and CLO exchange-traded funds last year, according to State Street . While the bulk of the market is focused on AAA-rated CLOs, investors may want to think about expanding exposure to other areas within the investment grade category, according to investment management firm VanEck. Assets with a rating of BBB- or higher by Standard & Poor’s or Baa3 or better by Moody’s, are considered investment grade and have a lower default risk compared to assets with lower ratings. “Given that the macro environment and the corporate corporate fundamentals are still strong in the U.S. in particular, there is a case to go into double As, single As, even triple Bs to an extent, to get the additional carry,” said Bill Sokol, director of product management at VanEck. A recent analysis by the firm found that over the past decade, A-rated CLOs outperformed AAA CLOs by 142 basis points per year — with lower volatility than investment-grade corporate bonds. BBB-rated CLOs beat AAAs by 147 basis points, the analysis found. One reason why CLOs are less volatile than corporate bonds could be tied to CLOs’ short duration. That is, their prices are less sensitive to fluctuations in interest rates. “With still getting a super attractive yield versus other investment-grade options, but lower volatility than a lot of high-yield or leveraged-finance options, we think CLOs are still in a sweet spot for this environment” said Fran Rodilosso, head of fixed income ETF portfolio management at VanEck. Individual investors have largely been drawn to ETFs that hold AAA-rated CLOs, like the Janus Henderson AAA CLO ETF (JAAA) . The fund has $22 billion in total net assets. It has a 30-day SEC yield of 5.37% and an expense ratio of 0.2%. However, the AAA-rated CLO ETF space has become crowded, said Kirsten Chang, senior industry analyst at data and analytics company VettaFi. “There are only so many that you can invest in. So I think people are looking farther along the spectrum,” she said. A number of issuers have been looking at the space, including VanEck and Eldridge Structured Asset Management, Chang noted. Janus Henderson also has a B-BBB CLO ETF (JBBB) , which as a 30-day SEC yield of 7.34% and 0.48% expense ratio. It has $1.86 billion in total net assets. VanEck’s CLO ETF (CLOI) has nearly 18% in AAA-rated CLOs and nearly 22% in AA-rated. It has about 10% in A-rated and less than 8% in BBB. The ETF has a 30-day yield of 5.65% and an expense ratio of 0.4%. “You can get much better yield potential and better total return opportunities by taking a more active approach that focuses on still high quality,” Sokol said. CLOI YTD mountain VanEck CLO ETF In the fall, the firm launched the VanEck AA-BB CLO ETF (CLOB), which invests primarily in the AA- to BB-rated tranches. It has a 6.6% 30-day SEC yield and a 0.45% expense ratio. There is some more risk involved as you move down in ratings. However, moving below AAA but staying within investment grade isn’t necessarily a big risk, VettaFi’s Chang said. “Considering how stable certain aspects of the market still are, despite the concerns about tariffs and rising inflation and the jobs market, I think we’re still at a decent point in the economy where you don’t have to worry about credit risk in a big way moving just slightly down that spectrum,” she said. For the team at VanEck, selectivity is key, especially with the uncertainty in the markets right now. The firm’s active approach focuses not only on relative value within the tranches, but also on individual security selection by looking at areas such as managers and underlying portfolios. “There’s going to be volatility, and that should lead to some really interesting opportunities in the space,” Sokol said.
