The rapid expansion of collateralized loan obligations (CLOs) has introduced ETF options for investors, including funds that are passive or actively managed. While passive indexes offer easy access to CLO exposure, the inherent mechanics of structured credit support the case for active portfolio construction.
Expert Framework for CLOs
During a webcast, John Kim, CEO of Reckoner Capital Management, highlighted why a hands-on, expert framework is essential for CLOs. One reason investors may be hesitant to allocate capital to CLOs is their inherent nuances and complexities, which require the expertise of CLO practitioners.
Because CLO pools are backed by dynamically changing corporate bank loans, the underlying risk and return profile can shift over the life of a deal. Active management provides critical risk mitigation and potential alpha generation that passive templates may overlook.
“To analyze a CLO bond directly is a little bit difficult because there’s a lot of inputs that go into the modeling,” Kim explained. “Each portfolio is different. Even if it’s the same manager, each one has a different style.
Active Management Benefits
Active managers distinguish themselves by performing rigorous research rather than blindly buying assets found in an index. In a field with many ETFs, an active manager evaluates underlying manager tiers, collateral quality, and aggregate bid depth to protect daily net asset value (NAV) liquidity.
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This micro-level analysis allows portfolios to side-step capital-constrained issuers while seeking to maximize risk-adjusted return profiles. One of the prime benefits of active management is the flexibility it provides to investors.
Reckoner Capital is leading the way in offering this actively managed strategy via ETFs like the Reckoner Yield Enhanced AAA CLO ETF (RAAA) and Reckoner BBB-B CLO ETF (RCLO).
Reckoner’s managers can transform the complex structure of a CLO into a tactical advantage. By scrutinizing CLO tranches and evaluating corporate loan portfolios in real-time, they can capture hidden valuation discrepancies without altering the broader portfolio risk footprint.
“Our shop is really a CLO shop,” Kim added. “The ETF wrapper is only one expression of our trading activity. We are trying to bring institutional-quality CLO management to the wealth management market through our ETFs.”
CLO Investment Risks
Each fund’s principal investment risks include management risk, novel structure risk, affiliated fund risk, collateralized loan obligation risk, non-diversified fund risk, new fund risk, leverage risk, and liquidity risk. For additional information about these and other fund risks, please refer to the “Principal Investment Risks” section of each prospectus.
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ETFs may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market prices (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Past performance is no guarantee of future results.
Collateralized Loan Obligations (CLOs) are structured products that issue different tranches, with varying degrees of risk, which are backed by an underlying portfolio consisting primarily of below investment grade corporate loans. Investments in CLOs present risks similar to those of other credit investments, including interest rate risk, credit risk, and liquidity risk.
A prospectus and a summary prospectus which contains this and other information about the fund may be obtained by visiting https://funds.reckoner.com/assets/pdfs/RAAA-RCLO-Prospectus.pdf or call 212.597.2500. Please read each prospectus carefully before investing.
For more news, information, and strategy, visit the Market Insights Content Hub. Investors considering CLOs should understand that these investments can be complex and may involve significant risks. They should carefully evaluate their investment goals and risk tolerance before investing in CLOs or CLO-based ETFs.
