Planned CLO funds could be risky for retail investors, executive says

ETFs that invest in collateralized loan obligations, such as the one Janus Henderson is proposing, may trip up individuals

As the tally of corporate defaults climbs, collateralized loan obligation ETFs have the potential to pose a risk for retail investors, said GTS Mischler principal Reggie Browne.

The warning comes a week after Janus Henderson filed plans with the Securities and Exchange Commission for an exchange-traded fund tracking the highest-quality CLOs. While professional investors could fare fine with this type of fund, individual traders might not be aware of the potential “liquidity concerns” during tumultuous markets, he said.

Browne, who has been dubbed the “Godfather of ETFs,” has been a central figure in helping those funds grow globally and a key force in selling their merits to investors.

CLOs, which package and sell leveraged loans into chunks of varying risk and return, are a cousin of the notorious collateralized debt obligations that exacerbated the 2008 financial crisis. The loans have drawn scrutiny in recent months after the coronavirus pandemic ignited a wave of corporate distress. Janus Henderson’s proposed fund would track top-tier CLOs rated AAA, the safest space in the $700 billion market.

“My chief concern is education to the retail community,” said Browne, who was a former senior managing director at Cantor Fitzgerald & Co. before joining market-making firm GTS. “Pros, they’ll get it right. My concern is mom-and-pop retail. Education may not be as high for certain retail investors.”

Janus Henderson declined to comment.

The actively managed Janus Henderson AAA CLO ETF (JAAA) is expected to be launched in October should the SEC give it a green light. Though other issuers have submitted plans for CLO ETFs, they have yet to begin trading. While CLOs don’t typically appeal to retail investors, an ETF would in theory make them far more accessible.

“The community has done a fine job with disclosure and underlining the risk factors by asset class,” Browne said. But “they’re not all the same.”