Investors who buy bundles of loans packaged into bonds are increasingly using exchange-traded funds to do so, according to a report from Bank of America.
ETFs have injected $9.5 billion into leveraged loan CLOs since the beginning of the year, even as holdings of AAA rated CLO bonds by other types of investors have dropped by $20 billion, Bank of America strategists wrote. Almost all of the ETFs’ cash has gone into AAA bonds, the most senior holdings.
Exchange traded funds can be easier for investors to buy compared with purchasing CLOs directly. The proliferation of CLO ETFs is helping bring more retail investors into the market, and is helping pull spreads tighter, Pratik Gupta, the head of CLO and residential mortgage-backed securities research at Bank of America, said in an interview.
“Because of ETFs, retail investors are able to buy CLOs at scale for the first time,” Gupta said.
CLO-focused ETFs now count over $16 billion in assets under management, more than three times the amount from this time last year, according to data the bank compiled in a report published last week.
While the pace of inflows is no longer growing fast, as it was earlier this year, money is still arriving in big chunks. Last week, $428 million flowed into CLO ETFs in a single day, a record, the bank said.
Risk premiums on newly issued broadly syndicated CLO AAA bonds were 1.36 percentage point over the Secured Overnight Finance Rate as of last week, down from 2.2 percentage points at the end of 2022, according to data from Wells Fargo.
ETFs focused on CLOs are a relatively new product. The first was listed in 2020 by Alternative Access Funds. But as their popularity has grown firms have rushed to offer new vehicles, and today there are as many as 19 CLOs, including those that have either launched or been announced, according to Bank of America. Nine of those were announced over roughly the last month alone.
An ETF launched by Janus Henderson focused on AAA tranches of CLOs is the largest, counting over $10 billion in assets.
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