BlackRock launches active AAA-rated CLO ETF

Jan 16th, 2023 | By | Category: Fixed Income

BlackRock has launched a new fixed income ETF in the US providing actively managed exposure to highly rated collateralized loan obligations (CLOs).

BlackRock launches active AAA-rated CLO ETF

BlackRock has launched an active ETF targeting floating-rate collateralized loan obligations.

The BlackRock AAA CLO ETF (CLOA US) has been listed on Nasdaq, coming to market with $20 million in initial assets under management.

CLOs are debt securities issued in different tranches by a trust or other special purpose vehicle and backed by an underlying portfolio consisting typically of below-investment-grade corporate loans.

The underlying loans, which are selected by a CLO’s manager, typically may include domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans.

Although the underlying loans are rated below investment grade, most CLO tranches are typically rated investment grade because they benefit from diversification, credit enhancements, and subordination of cash flows.

CLOs have historically been available only to institutional investors and were only packaged within the ETF wrapper for the first time in 2020. Despite some initial skepticism, investor interest in CLOs has been robust due to inherent benefits such as low volatility, low downgrade risk, and low correlations with traditional fixed income assets.

Additionally, the loans underlying CLOs are also almost exclusively floating-rate in nature which proved popular with investors last year as inflation soared and central banks worldwide rapidly increased interest rates.

Investment process

The ETF seeks to provide capital preservation and current income by investing at least 80% of its assets in US dollar-denominated, AAA-rated CLOs of any maturity.

The remaining proportion of the fund’s assets may be allocated to other high-quality CLOs that have a minimum rating of A at the time of purchase. After purchase, a CLO may have its rating reduced below the minimum rating required by the fund for purchase. In such cases, the fund will consider whether to continue to hold the CLO.

To further promote diversification, no more than 10% of the ETF’s portfolio may be invested in any single CLO.

As of 16 January, the ETF had a weighted average coupon of 5.40% with an effective duration of -0.02 years. The fund makes distributions to investors on a monthly basis.

The ETF comes with an expense ratio of 0.20%, six basis points cheaper than its main rival, the Janus Henderson AAA CLO ETF (JAAA US). JAAA launched in October 2020 and quickly found an audience with investors, having already amassed $2 billion in AUM. The fund returned 0.5% in 2022, notably better than most other segments of the fixed income market.

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