First ETF tracking $700B CLO-market starts trading
Investors will now have their first chance to buy collateralized loan obligations through an ETF.
The AAF First Priority CLO Bond ETF begins trading on the NYSE under the ticker AAA on Wednesday. The fund tracks the highest-rated CLOs and is actively managed, according to Alternative Access Funds co-founder Peter Coppa, who previously worked as a money manager at Marathon Asset Management. While many loan ETFs exist, AAA is the first focused on CLOs to debut.
CLOs, which package and sell leveraged loans into chunks of varying risk and return, have drawn scrutiny in recent months after the coronavirus pandemic ignited a wave of corporate distress. Veterans of the $4.7 trillion ETF industry have warned that packaging the loans into funds that are easily accessible could pose a risk to retail investors unfamiliar with the $700 billion CLO-market. But the industry’s performance through the 2008 financial crisis and the virus outbreak shows that it’s appropriate to offer CLOs in an ETF, Coppa said.
“These particular bonds have maintained their AAA rating through a variety of market selloffs, and we think that’s a testimony to it being a good product and reasonable for retail investors to have access,” Coppa said.
More than 25% of the products were sold with shorter or static maturities in the first quarter, compared with only 10% for the same period last year.
The strategy has in theory made no money for investors 42% of the time since 2018, new research shows.
There is growing disquiet among those who run and invest in the products about potential problems that might be caused by rate cuts from the Fed.
While CLOs don’t typically appeal to retail investors, an ETF would in theory make them far more accessible. CLOs are a cousin of collateralized debt obligations, which became notorious for their starring role in the 2008 financial crisis. There are several major differences, however, not least that CDOs bundle loans to consumers rather than businesses.
Though other issuers have submitted plans for CLO ETFs, AAA is the first to begin trading. Janus Henderson filed for a top-tier rated CLO ETF in July, which is expected to debut in October should the SEC approve it.
“My chief concern is education to the retail community,” said GTS Mischler principal Reggie Browne. “Pros, they’ll get it right. My concern is mom-and-pop retail. Education may not be as high for certain retail investors.”
AAA will charge 25 basis points. It’s the first ETF to be launched by Alternative Access Funds, which was co-founded by Coppa in 2018.