Bonds are bouncing back, but yields remain high, presenting income-oriented investors with a tempting scenario. However, with the possibility that interest rates will creep higher and elevate default risk in the high yield space, advisors and investors may want to go beyond basic fixed income strategies.
The VanEck CLO ETF (NYSE Arca: CLOI) is an example of an exchange traded fund that could be relevant to fixed income investors seeking fresh approaches in the current environment and beyond. Actively managed and sub-advised by PineBridge Investments, CLOI turned a year old last month. Collateralized loan obligations (CLOs) — the asset class to which CLOI provides exposure — are gaining traction among advisors and professional investors. Therefore, the VanEck ETF could be a compelling income solution in the right place at the right time.
CLO tranches are typically comprised of senior secured bank loans — an asset class that usually features above-average yields. CLOI lives up to that billing with a 30-day SEC yield of 6.30%.
Active Management Could Benefit CLOI
There’s often debate about the efficacy of active management in the bond market. However, there are some corners of this space where active management can be efficacious. CLOs are part of that group, and that could bode well for CLOI’s long-term prospects.
“CLOs are actively managed vehicles—i.e., they have a reinvestment period during which the manager can buy and sell loans within the portfolio and reinvest within the parameters set forth by the governing documents,” noted William Sokol, VanEck director of product management. “Managers can add value by reinvesting and positioning portfolios to increase returns in benign economic environments and protect against downside risk during weaker economic times.”
CLOI has another trait interest rate-weary investors may want to consider. CLOs aren’t fixed rate assets, meaning they’re less sensitive to changes in interest rates. Against any backdrop, that’s an attractive trait, but its allure could be heightened in the back half of 2023. Some market observers believe there’s a lingering possibility the Federal Reserve will be forced to raise rates again, albeit in gentle fashion.
“CLOs are also floating-rate instruments, meaning they have low sensitivity to changes in interest rates,” added Sokol. “As interest rates rise or fall, CLO yields will move accordingly, and their prices have historically moved less than those of fixed-rate instruments. These characteristics can be advantageous to investors in diversified fixed income portfolios.”
For those not familiar with CLOs, there are other points in favor of CLOI. As Sokol noted, CLOs are a $1 trillion market (as of 2021) with ample liquidity.
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