CLO ETFs: Alternative Assets Gain Traction

Investors are increasingly embracing alternative assets within the familiar exchange-traded fund (ETF) structure, according to John Kim, the CEO of Panagram, in a recent interview at the 2024 etf.com Awards by etf.com's Senior ETF Analyst Sumit Roy. This trend allows individuals to access asset classes previously limited to institutions. 

CLOs: A Unique Fixed Income Opportunity

One area of particular interest is Collateralized Loan Obligation (CLO) ETFs. Traditionally, CLOs were the domain of institutional investors. However, by offering them as ETFs, Kim highlights the ease of access and potential benefits for individual investors.

"The number one area that we see in our area of the market is an increasing acceptance of alternative assets in the ETF format," says Kim. "Bringing them to the market in the ETF wrapper really makes it easy to access, easy to trade." 

Kim also highlights the raising popularity of the Panagram BBB-B CLO ETF (CLOZ), a fund that targets USD-denominated collateralized loan obligations (CLOs) that are rated between BBB+ and B- with a credit spread of 5%. CLOZ received a nomination for the “Best New Active ETF” category in the 2024 etf.com Awards.  

Why CLO ETFs Are Resonating

Kim identifies three key features that make CLO ETFs attractive: 

• Floating Rates: Unlike traditional bonds, CLOs offer floating rates, which can benefit investors in rising rate environments like the current one. 
• Strong Performance: CLOs boast a historically low default rate, offering a potentially high-yield, low-risk combination. 
• Diversification: Since CLOs exhibit low correlation with traditional stock and bond portfolios, they can enhance portfolio diversification. 

CLOs vs. Junk Bonds

While CLOs share some similarities with high-yield bond funds in terms of targeted returns, Kim emphasizes key differences. "CLOs are floating rate high yield and bonds are fixed rate," explains Kim. "So, you don't have the interest rate risk and duration risk that you have with high yield." This means CLO investors are less exposed to potential fluctuations in interest rates.  

Kim suggests CLO ETFs offer a compelling option for investors seeking high yield, relative safety, and lower volatility compared to traditional alternatives. Their recent performance seems to support this claim, with some CLO ETFs delivering double the returns of junk bond ETFs over the past year.  

Overall, the conversation underscores the growing interest and potential benefits of incorporating CLO ETFs into investment portfolios, particularly for investors looking to navigate current market conditions while balancing yield and risk. As the acceptance of alternative assets in ETFs continues to rise, CLO ETFs are well-positioned to capture wider investor interest.