At a glance
- Kim, a 30-year structured credit veteran, said CLOs had been "a backwater for most of my career" and have only recently become available to individual investors and RIAs.
- For advisors, the practical step is to check which tranche a CLO ETF holds, because that sets the risk-and-yield trade-off.
- A typical CLO pool holds 150 to 300 senior secured, first-lien, floating-rate broadly syndicated loans, the collateral Kim used to explain the structure.
CLO tranches pay wider spreads than similarly rated corporate bonds because of a complexity premium, not greater credit risk, Reckoner Capital Management CEO John Kim said in an Oct. 27 ETF Trends webcast.
Kim, a 30-year structured credit veteran, said CLOs had been "a backwater for most of my career" and have only recently become available to individual investors and RIAs. He spoke with VettaFi senior industry analyst Kirsten Chang in "Navigating the CLO ETF Landscape." ETF wrappers have helped draw retail and advisor attention, and the webcast named Reckoner among the issuers that have released CLO ETFs to the general investing public.
For advisors, the practical step is to check which tranche a CLO ETF holds, because that sets the risk-and-yield trade-off. Two funds holding the same kind of collateral can still offer different yield potential, so the tranche and its rating matter more than an expense-ratio comparison in a first pass.
A typical CLO pool holds 150 to 300 senior secured, first-lien, floating-rate broadly syndicated loans, the collateral Kim used to explain the structure. Those loans sit at the top of a corporate capital stack, giving the holder a first-lien claim on corporate assets in a default, and the pools operate under strict diversification rules. "Remember, you're still only taking risk on senior secured loans at the end of the day," Kim said.
"In this case, you're taking less risk, but you're getting an opportunity for higher yield potential than you would otherwise get, which is a great thing for people to take advantage of," Kim said. "It's a very different kind of instrument from other types of securitizations, which might have different types of non-senior assets."
In this case, you're taking less risk, but you're getting an opportunity for higher yield potential than you would otherwise getJohn Kim, chief executive of Reckoner Capital Management
Reported by the Issuers desk from ETF Trends. Published . Corrections