How One Fund is Transforming the Investment Landscape
The financial tides are shifting. With the Janus Henderson AAA CLO Exchange-Traded Fund (ETF) hitting a staggering $10 billion in assets under management (AUM), it's clear that collateralized loan obligations (CLOs) are becoming a powerhouse in the investment realm. This article delves into the burgeoning world of CLO ETFs, the driving factors behind their rise, and what sophisticated investors should consider as they ride this wave of opportunity.
Key Takeaways:- Janus Henderson's JAAA fund has amassed $10 billion in AUM, leading the CLO ETF market.- CLO ETFs offer floating rate income, providing potential benefits in rising interest rate environments.- John Kerschner predicts the JAAA fund could continue its rapid growth, potentially adding another $5 billion by the year-end.- The CLO ETF market is poised to expand, possibly reaching $20-$30 billion in the near future.
The Rise of CLO ETFs: A New Asset Class for Sophisticated Investors
The Janus Henderson JAAA fund, launched in October 2020, has skyrocketed to $10 billion in AUM. This phenomenal growth reflects a keen interest in CLOs among investors seeking higher yields and portfolio diversification. John Kerschner, head of U.S. securitized products at Janus, emphasizes the fund's strong performance and future growth potential:
"We would expect the overall CLO ETF market to eventually grow to somewhere in the range of $20 billion to $30 billion. The AAA CLO ETF market will probably be 80% of the overall CLO ETF market as it matures."
What Are CLOs and Why Are They Attractive?
CLOs are securities backed by a pool of high-risk, high-yield leveraged loans. These loans are typically issued to companies with lower credit ratings. Investors in CLOs receive payments derived from the interest and principal repayments of these loans. For high-net-worth individuals, CLO ETFs offer a way to gain exposure to this asset class without the complexities of directly investing in individual loans.
Floating Rate Advantage
One of the most compelling features of CLO ETFs is their floating rate income. Unlike fixed-income securities, CLOs adjust their payments based on prevailing interest rates, making them less susceptible to interest rate risk. As Kerschner notes:
"Retail investors, institutional investors, pretty much anybody, this ETF works for, and the reason why is it’s floating rate. Interest rates went up, so bond prices went down, and a lot of fixed-income products were down double-digits. JAAA was positive last year and that has continued this year."
This feature becomes particularly valuable in a rising interest rate environment, where fixed-income securities typically underperform.
Low Interest Rate Volatility
CLOs generally exhibit low interest rate volatility compared to other bond investments. This stability is an attractive trait for investors looking to mitigate risk. John Kim, CEO and CIO at Panagram, highlights the appeal:
"The idea of an ETF is very attractive to [insurance companies] for cash flow management because it allows them to navigate liquidity without having to buy and sell the underlying assets."
The Competitive Landscape: Janus Henderson's Dominance
Janus Henderson's strategy has not only been about being early to the market but also about maintaining a competitive fee structure. The JAAA fund charges a modest 22 basis points, which is just slightly higher than BlackRock's competing product that launched more recently.
Other Players and Market Expansion
While Janus Henderson leads the pack, other asset managers like BlackRock, PGIM, and Invesco are also competing in the CLO ETF space. These funds have drawn interest from a variety of investors, ranging from retail to institutional entities.
Steve Laipply, Global Co-Head of iShares Fixed Income ETF at BlackRock, mentions:
"A big part of the appeal of an ETF wrapper is that it now provides investors with an exposure that would have been pretty hard for them to access before."
What Lies Ahead: Future Growth and Market Potential
The CLO ETF market is still in its nascent stages but is showing robust signs of growth. The potential for this market to expand significantly is high, especially as more investors become familiar with the benefits of CLOs. Citi strategists, including Drew Pettit, have optimistic projections:
"The CLO category is still in its early innings. There is a possibility that more than one product can have an institutional use case, which is common in other credit ETF categories."
This sentiment is echoed by several other market experts who foresee a substantial increase in the adoption of CLO ETFs, possibly reaching between $20 billion to $30 billion in AUM.
Risks and Considerations for Investors
While the prospects for CLO ETFs are promising, investors should be mindful of the associated risks. These include credit risk, interest rate risk, and liquidity risk, among others. Edwin Wilches, co-head of securitized products at PGIM, advises caution:
"Maybe CLO ETFs get big enough to where they help replace some of the U.S. money center banks' lack of appetite for AAA CLOs. This may be the new marginal buyer that comes into the market."
Conclusion: Seizing the Opportunity
The explosive growth of the Janus Henderson JAAA fund underscores the increasing demand for CLO ETFs. For sophisticated investors, this asset class offers a compelling combination of higher yields, diversification benefits, and resilience to rising interest rates. As the CLO ETF market continues to evolve, staying informed and strategically investing in these products can unlock substantial growth potential.
Join the conversation, explore further resources, and consider how CLO ETFs could fit into your long-term investment strategy. The future of investing is here, and it's brimming with opportunities for those who dare to seize it.
