(Bloomberg) – When the first ETFs tracking secured loan bonds arrived, concerns about easier access to these complex securities were allayed by the fact that funds were only targeting the highest-rated debt.
Bloomberg’s Most Read
A little over a year later, the market takes the inevitable next step: A fund laden with loans rated BBB or below is on its way.
Janus Henderson filed Wednesday for the Janus Henderson B-BBB CLO exchange-traded fund (ticker JBBB). If approved, it will invest at least 80% of its assets in securities rated from BBB + to B-, depending on demand.
This is a significant change in the scale of credit quality from the two existing US CLO ETFs. The Janus Henderson AAA CLO ETF (JAAA) and the AAF First Priority CLO Bond ETF (AAA) target the highest rated securities.
Theoretically, this means that any investor, from mom and pop to the Reddit crowd, can have access to sets of leveraged loans issued to riskier US companies. This is causing concern for some fund managers as they might end up buying something that they don’t fully understand.
“I don’t think retail really needs to get into BBB CLOs, and I don’t like wrapping less liquid instruments in liquid packaging,” said John McClain, bond portfolio manager at high yield at Brandywine Global Investment Management. “By diving into the pile, you are scooping up pennies in front of a steamroller of liquidity if the market stops.”
CLOs are a cousin of secured debt securities, which became known for their prominent role in the 2008 financial crisis. There are, however, several major differences, including the fact that CDOs pool loans to consumers rather than to consumers. companies.
Historically, they have not generated much interest from retail investors. While this was originally because of their inaccessibility, the launch of AAA and JAAA last year suggests deeper skepticism. Neither ETF has attracted huge inflows, with AAA holding just $ 10 million in assets while JAAA claims $ 224 million thanks to an inflow of $ 100 million this year.
The new fund “will serve a very specialized audience who probably would have bought this product anyway but who like the convenience of an ETF,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence.
The filing comes amid a hot CLO market, where sales in the United States are approaching a new annual record. CLOs buy leveraged loans which are all variable rate, thus theoretically taking advantage of a rising yield environment.
At the same time, average credit scores on loans in CLOs are improving, as debt raters upped the scores and fund managers focused on better quality loans, Barclays strategists said. last week.
Read more: Strategists Cannot Track CLOs While Volumes Are Close to Forecast
A spokesperson for Janus Henderson did not immediately respond to a request for comment.
Bloomberg Businessweek Most Read
© 2021 Bloomberg LP