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November 2020 | Issue 229
CLO ETFs take off after market passes covid-19 liquidity test
Hugh Minch
The launch of the first CLO exchange-traded funds in recent weeks marks a turning point for the CLO industry, with senior tranches starting to be viewed as a liquid alternative to corporate credit.
Alternative Access Funds launched AAF First Priority CLO Bond ETF on 9 September, followed by Janus Henderson launching CLO AAA ETF on 16 October, with both strategies seeking capital preservation as a primary objective.
Nick Cherney, Janus Henderson’s head of exchange traded products, says the sharp sell-off in credit in March proved that CLOs were resilient, with some investors turning to the product in search of a safe haven.
“When you looked at the drawdowns that occurred in March, it turned out a lot of corporate credit investors were turning to CLOs for liquidity rather than the other way around,” he says. “One of the challenges of bringing a product like this to market was getting comfortable that the asset class had matured enough to handle a daily liquid vehicle.”
Janus Henderson will allocate 90% to triple A debt, focusing on top-tier managers, with a 10% bucket for more junior CLO notes that will offset the management fee, according to Cherney. The fund has $119.6 million of assets as of 27 October. AAF First Priority CLO Bond ETF weighs in at just $10 million.
Both ETFs have exposure to some of the largest CLO managers (BlackRock, CSAM and Octagon), but the Janus Henderson offering features newer bonds among its biggest exposures.
Cherney says that the ETF was seeded by six investors that are major broker-dealers in the CLO business, adding that around 50,000 shares have traded.
“People we see as early adopters are family offices or ultra-high net worth individuals — quasi-institutional investors with knowledge of the CLO space who have only been able to access lower-rated tranches through less liquid structures previously,” says Cherney.
“Similar launches in fixed income have really become the go-to vehicle for investors that want access to loans or corporate bonds in a more efficient fashion, and we see this as having that kind of potential.”
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“Credit investors were turning to CLOs for liquidity”
Nick Cherney,
Head of exchange traded products | Janus Henderson
Global credit funds & CLO's
November 2020
| Issue 229
Published in London & New York.
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