Earlier today fabrib posted that some of the big money managers are now looking at launching CLO ETFs. Of course there are already a couple out there that concentrate on the more quality tranches of CLOs. This link should access the article.
Janus has the Janus AAA CLO ETF and the Janus B-BBB CLO ETF.
Anyway while poking around looking for information on CLO ETFs I came across Barrons article on CLOs–this is from April. An interesting read.
This information is just posted for all to access some information on this asset class which is misunderstood many times. It should be noted that when the big money moves into an area it makes me a bit nervous.
Note I don’t own and will never own a common share of a CLO company—I’m sticking to the ‘senior securities’–that is my risk tolerance.
Jacks article starts off well, then fizzles out and adds nothing.
We were discussing repacked private equity yesterday. Evidently the largest investors (calpers etc) own too much and are ‘lightening’ their holdings. And this will ‘benefit’ the smaller investors who ‘need’ exposure. They are bundled and sliced into deals (tranches) where you too can get in on the action. ‘Uncorrelated returns’ is the goal…..Shades of 2005-2007. Thats when the ‘unwashed masses’ were finally given access to sub prime, CLO, CDO, new CEF’s, and hedgies.
Having lived thru 1993-1994 explosion in CMO prices I’ve always been resistant to their features. (had bloomberg on my desk) The whole 2/20 idea made me puke. But even I got sucked into some of the CEF deals 2006 ish. ………My friends had a wholesaler take them out for drinks as they promoted a new CEF before 08-09. …It was a $55,000 bar bill……”The most expensive free drinks I’ve ever had”
PE is one thing. And is clearly here to stay. CLO/CMO/CDO of PE is another. Be careful. We are in ‘An Everything Rally’…..Screens showing 95-98% green….If it’s not up now what’s that tell you?
IYP – Most of us here remember the GFC debacle. There was fraud with all participants (borrowers, lenders, raters, etc). These CLOs and associated ETFs are touted as AAA or BBB depending on the fund. Do you have any indication there are shenanigans going on? I surely understand the comparisons to what happened previously.
Lol no I don’t. And ‘we’ have deep extensive PE positions. None of which I’ve directed. It’s just a feeling. At this point in my career controlling my risks is Paramount. I don’t need any more added risks then I’ve already signed up for.
With heavy preferred exposure, bank CRE books are more then enough unknowable risk. Pfds are close to all time high prices. The infamous tip from the show shine guy at Grand Central is similarto one of many tells. Bull bear AAII ratios are extreme
Perfect. I’m right there with ya. My CLO ETFs are 3% of my total holdings so not too concerned. It definitely feels like the everything bubble as you mentioned. I’d rather miss out on gains at this point than ride the flush, that is, if markets are ever allowed to go down again.
I’ve lived thru too many tops to miss this rebalance opportunity.
Had a wholesaler from JPM give me their view a couple months ago. I dont know if any have seen their quarterly reviews, but they’ve been doing a great job. They said “we see SP at 5725 in one year”. Another 5%. It did that in less than a week.
The most telling are P/E charts. We’re like 21-22. …..25 being all time high. Can it go further, of course. Will it? Possibly. Can I afford not to squeeze all the P out of this? Questionable.
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
Thanks for passing that along! Wow that’s a lot of data to sort through!
That 30yr chart of the S&P almost looks like it’s going parabolic.
What I suggest to others is….Don’t get lost in the research, which can be like drinking from a fire hose, just look for what makes sense. Skip the rest.
Thanks Iyp I want to explore it a bit more.
I own EIC and EICC….I went on their website and and pulled these numbers…don’t shoot the messenger…this is what I read off the 8k filed…
7/31 estimated NAV of $15.16-15.26
9/30 estimated NAV of $14.85-14.95
9/30 estimated eps of .55-.59
6/30 eps of .60
there could be alot of reasons for these numbers,… more shares, writeoffs, slower business, higher executive bonuses….who knows…I don’t know if this is a red flag or not…I did sell half of my EIC
Craig, One of the reasons not to own the common.
Tim, Thanks for posting the Barron’s article. Make’s you wonder. Someone posted earlier today or was it yesterday. If a few people like Michael Burry who saw the problem with CMO’s might see the next big market event and what would it be?
CLO’s and now CLO ETF’s being bundled together and being called safe investments that have never had a major default are going to give me nightmares tonight in my sleep. Black swan? sleep well at night? As my wife says cue the music.
https://www.youtube.com/watch?v=GfQu5po6USo#:~:text=John%20Williams%20composed%20the%20film's,%22F%20and%20F%20sharp%22%E2%80%94
Just my two cents: I own a handful of these CLO ETFs. If they all went away I certainly wouldn’t be happy, but I don’t own enough to keep me up at night. When I think of these ETFs, they do provide portfolio management, diversification, and liquidity. Can’t say that for my individual preferred and bond holdings. As a matter of fact, during market stress individual holdings can get cut in half in the blink of any eye. Yes, that can present some great opportunities, but I’ve been through enough meltdowns and don’t need any more.
After the GFC, if there are games being played by the rating agencies with these CLOs, I think this time someone would definitely go to prison. Let’s hope we don’t have to find out.
Rocky –
Quick question – why do you have your CLO exposure in an ETF instead of a CEF? Is it because the CLO CEFs utilize 35% leverage? Are the CLO ETFs using leverage?
My fear with the ETFs is that if we do have even a mini black swan event in the CLO space, the massive selling in the underlying ETF shares will cause the fund managers to blow out of some of their holdings in the ETF at rock-bottom prices. There is no fear of that happening with a CEF, unless their leverage coverage ratios seriously start to crack.
JAAA does not use leverage.
https://www.aaii.com/fund/ticker/JAAA
I use it to park cash- along with SGOV, CLIP, and USFR
Good question, no good answer with the exception of the leverage issue. As Gary mentioned, I don’t think ETFs use leverage. Again, if we get a market event, individual bonds and preferreds get sold in a vacuum, they just plummet on no volume because the bids disappear. Not saying that can’t happen with an ETF, but at least they hold 100-200 positions. All CLO debt isn’t going under unless we have massive fraud like the GFC. ***
*** I’m no expert here. I’m relying on the fund managers to do their job. We’ll see how that works out.
PS – With CEFs, they can go to massive discounts to NAV. ETFs at least trend to NAV, other than intraday flash-crashes.
own JBBB and consider it a core holding; i’m expecting the yield to mitigate along with the Fed interest decreases,
I thought it might be useful to add this one: Invesco CEF Income Composite (PCEF) at 19.65$ with annual div 8.20%, 0.13 paid monthly around 20th.
I can’t see rationale for this one ; it has double layer of fees; the fee for the ETF plus the fees for the listed companies it holds ;?
Plus PCEF doesn’t seem to have anything to be CLO related fund as far as I can see….. Yields quoted are always after the fees have been paid.