Market Overview

Collateralized Loan Obligations Come To ETF Land With 'AAA' Debut

Collateralized Loan Obligations Come To ETF Land With 'AAA' Debut

Chalk this one up as “what will they think of next” in the world of exchange-traded funds because there's now an ETF dedicated to collateralized loan obligations (CLOs).

What Happened: Courtesy of Alternative Access Funds, the AAF First Priority CLO Bond ETF (NYSE: AAA) debuted Wednesday.

Not only is AAA the first ETF dedicated to CLOs, but, fun fact, it will also be the first ETF in any alphabetical list of this asset class.

Why It's Important: Alright, fun facts aside, CLOs are usually the territory of professional fixed income traders, so it'll be interesting to see if AAA catches on with a less sophisticated audience. CLOs, which at various points in time have been controversial, are packaged loans of varying duration and quality.

It's a massive market – $700 billion to be precise – and one that took some lumps during the global financial crisis and earlier this year when markets swooned because of the coronavirus pandemic.

The new AAA avoids credit risk by adhering to its ticker and holding only CLOs with that rating. The ETF came to market with 13 holdings and 40.32% in cash, indicating its lineup could grow with time as that cash is deployed. AAA is actively managed, which is likely a sensible approach to this particular asset class.

“The asset class has a long history of principal preservation; since the inception of the asset class in 1994, AAA-rated CLOs have never experienced a default,” according to Alternative Access Funds.

What's Next: With proper education, AAA could find an audience with yield-hungry investors, particularly at a time when Treasury yields are so paltry.

On a historical basis, CLOs are negatively correlated to Treasuries and have low correlations to investment-grade corporate debt, indicating the new AAA could be an interesting portfolio diversifier for income investors.

AAA charges 0.25% per year, or $25 on a $10,000 investment, which is reasonable for an actively managed fund providing unique exposure.


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