It’s not just stock and fees. The corporate debt market is also recently “Yippy”. And one corner to keep an eye on is exchanged funds that invest in secured loan obligations.
The CLO ETF has exploded in popularity over the past few years, bringing the total assets of a small number of funds to $300 billion, up about 13 times the $2.3 billion they held at the end of 2022 as investors round out their punchy yields. About half of that was included in Janus Henderson’s Jaaa ETF.
However, some cracks are beginning to appear in the market after investors scored a record of $1.8 billion from funds a week, according to MorningStar data. As TMX Vettafi’s Todd Rosenbluth points out, some of its wide reductions:
Whether it carries credit risk through high-yield bonds, advanced loans, or closings, non-Treasury bonds are no longer preferred by investors. Investors are just hiding. JAAA has been one of the hottest ETFs of the past year and a half, but it’s inevitable that people will regain exposure as the environment changes.
However, Clo ETFs are particularly interesting. Let’s go back a bit to explain why Alphaville is so interested in how these funds are run.
Clos are often constructed from floating corporate loans for treasury companies with non-investment grade BB or B credit ratings, often against treasury stock support companies. The loan is then bundled into a pool of debt and then securitized.
This allows CLO managers to slice the pool into tranches at varying degrees of risk and sell it to investors. Through the magic of securitization and overcooperativeization, most of these junkie loans can be converted into triple-A-level security that is risk aversive, but best suited for yield-hungry pension plans or insurance companies.
Recently, they have been a huge hit with retail investors since 2022, as they imposed returns on floating rate loans.
It’s no secret why the air came out of the Clo ETF. Since its introduction in 1997, the tranches that most ETFs like have never been rated AAA-rated CLOs, which have been the default, but fear of default exacerbates the whimsicality of credit risk. Furthermore, growing expectations for a reduction in the Fed rate reduce the appeal of floating rate debt.
Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, said investors will also be in crisis, with the rating being “the perfect price” and becoming vulnerable to wobbling.
They are a means of trust. They may be high capital structure in some respects given their securitized nature, but they still have a credit component, and what we see is the sale of credit assets.
The wave of closing sales by ETFs exacerbated the challenges that some private equity groups face in finding debt buyers, causing bond sales to be suspended by companies supported by Apollo and those that have Patient Square Capital suspended.
But for Alpha Bill, the more relevant question is how it works in a more chopper environment. These CLO ETFs have long been questioned about how they will build fares in a similar crisis, not because of the big fat stress test in March 2020.
Even junk bond ETFs invest in public securities that have been fairly aggressively acquired. Clo Tranches and Clo Loans, on the other hand, are inherently personal credit, and require a little care in both cash and physical redemption. In Europe, regulators are particularly cautious, allowing only the first European Clo ETF to list in September.
And the wave of sales led some funds to trade at the value of their underlying assets and the thick discount.
The average discount on net asset value exceeded 1% at the start of the sale from the 0.04% premium a day ago, with the $94 million Vanek AA-BB Clo ETF being 4.4% off and the $13.9 million Eldridge AAA Clo ETF being one of 3.7%.
However, this was more than just a problem for a small Clo ETF. Even the JAAA traded at a 1.1% discount as investors dragged a record $1.3 billion.
This is despite the relatively low actual investment losses at this stage. JAAA stock price fell 1.3% this month, with Eldridge ETFs down 0.8% and Vaneck Vehicle down 2.3% (though the losses are greater as Eldridge ETFs targeting B-rate debts fall by 3.1% from BBB). The discount has since been narrower, but remains wider than usual.
But I believe that this doesn’t mean the ETF itself is a problem, but that discount blowouts, such as FTAV’s Robin, reflect the fact that the underlying security prices are old and outdated.
“The underlying bonds within ETFs are not real-time, but ETFs are real-time, so we can see NAV discounts during times of market uncertainty,” Rosenbluth said.
ETFs give real-time price transparency. It will take time for the bond market to catch up. If you don’t need to trade, don’t trade during the time of market volatility as there is a discount during the sale of the market.
perhaps. However, it will be interesting to see how these Clo ETFs will be maintained as the turbulence in the credit market escalates further.
Read more:
– ETFs eat bond markets (FTAV)
