Kol Estreicher, Head of the RIA Channel for VanEck, joined Keith Black, Managing Director of RIA Channel, to discuss how collateralized loan obligations (CLOs) earn yields while reducing the risk of interest rate volatility.
Estreicher notes that CLOs are VanEck’s highest conviction fixed-income idea in today’s market and beyond. CLOs are portfolios of senior loans, which are differentiated by the securitization process. Each CLO is separated into tranches or segments by credit quality. Each tranche has a different credit rating and varying risks despite holding claims to cash flows from a single portfolio of loans.
Investors should not be concerned about CLOs, as they have been around for over three decades. Banks and insurance companies use CLOs for cash management or more opportunistic investments. CLOs can benefit investors by providing quality yields with low duration and low volatility. CLOs holding floating-rate loans have less interest rate risk than fixed-rate high-yield bond investments. Estreicher views CLOs as a static allocation across interest rate and credit cycles. In 2022, when investment-grade fixed income underperformed advisors’ expectations, CLOs earned flat to positive returns due to the lower duration risk.
Because CLOs have higher yields and lower volatility, they can be used to replace portfolio exposures to investment-grade corporate bonds. Due to their structural credit protections, other investors may substitute CLOs for direct exposure to senior loans. CLOs can also be added as a higher-yielding supplement to core bond portfolios. CLOs pair especially well with Treasuries, as Treasuries have interest rate risk without credit risk, while CLOs have credit risk with lower interest rate risk.
VanEck manages two CLO ETFs. The VanEck CLO ETF (CLOI) is an actively managed investment grade strategy, while The VanEck AA-BB CLO ETF (CLOB) is an actively managed mezzanine strategy. The unconstrained ETFs can hold cash as dry powder to be invested at a time of market dislocation.
WEBCAST – Private Markets Playbook: Private Credit
The Private Credit session will provide an in-depth discussion on how advisors can potentially enhance yields and portfolio diversification utilizing private credit strategies. Join us for this two-hour, interactive program covering:
- Overview of the private credit investment landscape
- The benefits of floating interest rates and senior-secured lending
- Portfolio construction and asset allocation considerations
- Historical performance, risks, structures, and access
Accepted for 2 CFP / IWI / CFA CE Credits
Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the speaker(s), but not necessarily those of VanEck or its other employees.
An investment in the VanEck AA-BB CLO ETF (CLOB) and the VanEck CLO ETF (CLOI) may be subject to risks which include, but are not limited to, risks related to Collateralized Loan Obligations (CLO), debt securities, foreign currency, foreign securities, investment focus, newly-issued securities, extended settlement, affiliated fund investment, management and capital preservation, derivatives, currency management strategies, cash transactions, market, Sub-Adviser, operational, authorized participant concentration, no guarantee of active trading market, trading issues, fund shares trading, premium/discount, liquidity of fund shares, non-diversified, seed investor, and new fund risks, all of which may adversely affect the Funds. Investments in debt securities may expose the Fund to other risks, such as risks related to liquidity, interest rate, floating rate obligations, credit, call, extension, high yield securities, income, valuation, privately-issued securities, covenant lite loans, default of the underlying asset and CLO manager risks, all of which may impact the Fund’s performance. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
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