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Analysis CLOs
CLO ETF market hits new heights
by Tom Davidson
Just when it seemed CLO ETFs couldn’t grow any faster, along came October. The final quarter of 2024 kicked off with net fund flows of almost USD 2bn in a single month — an all-time record
After a relatively quiet summer, a two billion dollar expansion in the CLO ETF market has pushed it to USD 18bn. The vast majority of October’s inflows were to triple A CLO ETFs, with mezz ETFs remaining virtually flat.
There are various reasons for the surge in inflows according to Ian Gilbertson, co-head of US CLOs at Invesco, and portfolio manager for the Invesco AAA CLO Floating Rate Note ETF (ICLO). “There’s clearly a seasonal driver to the October fund flows, but there’s also no denying that in this rate environment CLOs remain the only scalable way to get access to highly rated floating assets,” he says.
CLO ETF AUM ($bn)
Source: BofA Global Research
Investors find CLO yields attractive
The importance of rates is echoed by Komal Shahzad, a senior vice president at Pinebridge Investments, which advises VanEck on two CLO ETFs. “With the current rates environment, we see strong demand for flow products more widely, but CLOs are also attractive on both a current yield and yield to maturity basis,” she says.
One of the challenges in analysing the CLO ETF market is that the investors involved are highly varied. As with all ETFs there are a large proportion of retail investors. But institutional investors are also an important segment — especially smaller firms, and those with different allocation needs and strategies. Shahzad says: “Despite the focus on retail investors, the ETF route can also be attractive for smaller institutional investors, which previously could not efficiently access the CLO market. ETFs are efficient and allow for easy allocation and rebalancing for investors.”
The behaviour of small institutional investors can be difficult to pin down, with market participants pointing out that the smallest — such as family offices — react to market conditions more like retail investors than pension funds.
The dominant player in the CLO ETF market remains Janus Henderson. The manager’s two CLO ETFs together account for almost USD 15bn of the USD 18bn total. John Kerschner, head of US securitised products at Janus Henderson, attributes the growth to a combination of the performance of CLO investments and the benefits of a high rate environment.
CLO ETF net fund flows ($m)
Source: BofA Global Research
Rise in long term rates boosts CLO ETFs
“The performance of JAAA through various market events has demonstrated its benefits, including diversification, attractive yield, high credit quality and liquidity — which have helped contribute to the growth of the asset class,” Kerschner says. “Additionally, even though central bankers around the globe are in the process of lowering short-term interest rates, long term rates have generally been on the rise. Market history has shown investing in floating rate CLO ETFs can help mitigate portfolio disruption that can arise from volatile interest rates.”
Looking to the future, CLO ETF managers seem understandably positive. “We don’t see any risks to CLO performance this year,” says Shahzad. “A lot of the performance is from carry, which can offset volatility on spreads.”
Despite a similar positive view for this year, Gilbertson sees some changes in store for the market next year. “This year the performance of all CLO ETFs has looked fantastic, but in the future we will see more differentiation in returns based on strategy and the fund manager. There are a lot of variations even for senior CLO ETFs in their baskets for double As or single As, in whether they can invest in middle market CLOs and so on.”
ETFs are efficient and allow for easy allocation
Komal Shahzad
Senior vice president
Pinebridge Investments
The desire to diversify seems to be driving a new generation of CLO ETFs. As well as more standard approaches from well known CLO investors, such as Nuveen and Palmer Square, two strategies have been drawing attention. One is for European CLO ETFs, with Fair Oaks blazing a trail with the launch of Fair Oaks AAA CLO Fund in September. Many other managers are said to be contemplating European ETFs, but face an uphill struggle against local regulators.
Staying on the US side of the pond, private credit CLO ETFs also seem to be gaining momentum, with Seix and Macquarie both looking to bring this kind of fund to market.
*Source: company filings, all data as of 25-Oct-2024
