VanEck has launched its second actively managed fixed income ETF in the US focused on collateralized loan obligations (CLOs).
William Sokol, Senior ETF Product Manager at VanEck.
The VanEck AA-BB CLO ETF (CLOB US), which has been listed on NYSE Arca with an expense ratio of 0.45%, builds off the success of the VanEck CLO ETF (CLOI US) which has accumulated $500 million in assets since debuting two years ago.
CLOs are floating-rate debt securities issued in different tranches by a trust or other special purpose vehicle and backed by an underlying portfolio typically consisting of below-investment-grade corporate loans. The underlying loans, selected by a CLO’s manager, can 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 due to the benefits of diversification, credit enhancements, and cash flow subordination.
However, lower-rated or sub-investment-grade tranches — often referred to as the equity or mezzanine tranches — carry higher credit risk in exchange for the potential of greater yields. These riskier tranches are more exposed to defaults within the loan pool but offer the opportunity for higher returns to compensate for the increased risk.
CLOs have historically served to diversify traditional fixed income portfolios, while their floating-rate coupons can help insulate investors from interest rate-driven volatility.
Investment approach
Both CLOI and CLOB are sub-advised by PineBridge Investments, a private, global investment manager with approximately $170 billion in assets under management and an extensive track record in issuing and managing CLOs.
While CLOI focuses primarily on investment-grade CLO tranches, CLOB distinguishes itself by delving into riskier CLO tranches, aiming to deliver higher yields while carefully managing the increased credit risk.
The fund invests across CLO tranches rated between AA+ to BB-, investing a maximum of 10% of its assets to CLOs outside of this credit range.
The portfolio consists of US dollar-denominated CLOs, with the option to invest up to 30% in foreign currency-denominated CLOs, for which it will typically hedge currency exposure.
PineBridge utilizes a bottom-up approach for selecting CLO investments, focusing on factors such as the CLO manager and underlying collateral, and it combines this with a top-down overlay considering broader credit views and risk positioning.
Commenting on the significance of CLO-focused ETFs and their growing relevance to the market, William Sokol, Senior ETF Product Manager at VanEck, stated: “The launch of CLO-focused ETFs has been an important development in the CLO market, which is now approaching $1.5 trillion globally, and also for ETF investors that were not able to access this market before. As ETF investors become more familiar with the CLO market and increasingly look for opportunities outside of AAA CLOs, we believe a risk-managed approach that actively captures market opportunities is the best way to invest in mezzanine CLOs. CLOB leverages PineBridge’s specialized knowledge and experience in this space and complements CLOI’s investment-grade focus. CLOB offers a diversified approach to mezzanine CLO investing with the benefits of the ETF structure: transparency, liquidity, cost, and efficient access.”