CLOI - CLOI: An Interesting Fund To Access Collateralized Loans

2023-12-17 06:52:11 ET

Summary

• VanEck CLO ETF offers investors access to high-quality Collateralized Loan Obligations (CLOs) for capital preservation and current income.
• CLOI is actively managed by PineBridge Investments and aims to provide an enhanced yield while avoiding downgrades and default losses.
• The fund is diversified with 69 holdings and primarily invests in investment-grade CLO tranches, offering issuer diversification and low interest rate sensitivity.

I like ETFs that provide investors access to more esoteric markets, which is why the VanEck CLO ETF ( CLOI ) is worth covering. Launched in June 2022, CLOI is an investment portfolio centered on high-quality Collateralized Loan Obligations (CLOs). CLOs are financial instruments that package a portfolio of senior secured loans into tranches with varying degrees of risk and yield. The securitization process allows the creation of investment-grade securities from underlying loans that might not be investment grade themselves. This financial innovation allows risk-averse investors to invest in a broader universe of highly rated securities.

The fund's primary goal is capital preservation and current income. It is actively managed by PineBridge Investments, a leading global asset manager with expertise in fixed income investing. The fund aims to provide an enhanced yield by identifying the most attractive segments of the CLO market while avoiding downgrades and default losses.

Details on ETF Holdings

CLOI has a total net asset value of $240 million spread across 69 holdings. Each of these holdings represents a tranche of a CLO, with different risk and yield profiles.

No holding makes up more than 5.54%, and it's fairly diversified for what it does.

Sector Composition

CLOI is primarily invested in high-quality tranches of CLOs. Specifically, it invests at least 80% of its assets in investment-grade CLOs. The fund has approximately 80% of its portfolio exposed to AAA-rated securities, which are considered the highest quality and least risky. The fund also invests a portion of its portfolio in AA and A-rated securities, allowing for some diversification across different credit ratings.

Peer Comparison

In the realm of ETFs, CLOI ETF has some competitors that offer exposure to similar asset classes. For instance, the Invesco Senior Loan ETF ( BKLN ) also invests in leveraged loans, similar to the underlying assets used to build CLOs. However, CLOI has a distinct advantage due to its active management and focus on high-quality, investment-grade CLO tranches.

Another peer is the Janus Henderson AAA CLO ETF ( JAAA ), which also invests primarily in AAA-rated CLO tranches. The performance has been roughly in line for the year, though CLOI has outperformed since inception.

Pros and Cons of Investing in CLOI

Like any investment, investing in CLOI has its advantages and disadvantages.

Pros

1. High Yield : CLOs have historically offered attractive yields relative to other corporate debt categories. CLOI aims to provide an enhanced yield by identifying the most attractive segments of the CLO market.

2. Low Interest Rate Sensitivity : As CLOs are floating-rate instruments, they have low sensitivity to changes in interest rates. This can be advantageous in a rising interest rate environment.

3. Active Management : CLOI is actively managed, which can potentially add value through strategic investment decisions.

4. Diversification : Each CLO typically contains at least 150-250 unique issuer exposures, providing additional issuer diversification.

Cons

1. Credit Risk : While CLOI primarily invests in high-quality, investment-grade CLO tranches, it is still exposed to the credit risk of the underlying loans.

2. Market Risk : Changes in economic conditions or other factors may adversely affect the value of the fund's investments.

3. Management Risk : The fund's performance depends on the success of the portfolio manager's investment strategies and tactics.

Conclusion

Investing in the VanEck CLO ETF ( CLOI ) can be a beneficial strategy for those seeking capital preservation and current income. The fund's focus on high-quality, investment-grade tranches of CLOs, along with its active management strategy, allows it to provide attractive yields while effectively managing risk. I think it's an interesting fund to diversify with, and it's worth considering.

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