In the current macroeconomic landscape characterized by longer-term higher interest rates, investors looking to optimize their short-term capital allocation should consider collateralized loan obligations (CLOs) as a potentially higher-yielding alternative to traditional cash proxies such as money market funds. While money market accounts provide a viable and widely used alternative to parking cash, their returns may struggle to keep up with inflation.
See more: Secure a return in an uncertain market with the RAAA ETF
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The AAA alternative
CLOs bridge the gap between traditional alternative money market accounts and higher-yielding corporate bonds by offering higher return premium potential. The underlying assets are senior secured corporate bank loans. For this reason, they have an automatic floating rate mechanism that is directly tied to the Secured Overnight Financing Rate (SOFR). If interest rates remain higher for an extended period, a CLO’s coupon resets quarterly, providing a hedge against duration risk.
Prospective fixed income investors seeking CLO exposure beyond the convenience of an ETF can start with the top of the capital stack Reckoner Yield Enhanced AAA CLO ETF (RAAA). AAA tranches represent the highest-ranking tranche issued from a securitized pool of senior secured loans. Investors get paid first in the event of a default and offer higher creditworthiness compared to their corporate bond counterparts.
Strive for greater earning potential
For those looking for more yield, there is another option Reckoner BBB-B CLO ETF (RCLO). RCLO focuses on BBB-B tranches that seek higher yields than AAA senior CLOs while maintaining significantly higher structural seniority compared to high-yield corporate bond options. As credit spreads tighten, RCLO is an option for investors looking to outperform inflation in this longer-term higher interest rate environment without incurring excessive corporate default risk.
“When you talk about a BBB or BB, the first thought is, ‘Oh, I’m going way down in the capital stack,'” said John Kim, CEO of Reckoner Capital, while speaking about CLOs in a webinar with TMX VettaFi. “But remember, at the end of the day, you’re still only taking risk on senior secured loans.”
The common denominator between RAAA and RCLO is their active management. Reckoner Capital’s structured credit experts allow them to navigate the nuances of the CLO market while leveraging their expertise to identify strong relative value. Both funds offer retail access to CLOs through a liquid, flexible and transparent ETF vehicle.
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Important information
Carefully consider the Fund’s objectives, risks, charges and expenses before investing. The prospectus below www.reckoner.com/raaa orwww.reckoner.com/rclo provides the full details. Read it carefully before investing. Investing involves risks, including the risk of loss of capital.
The Fund’s principal investment risks include management risk, novel structure risk, affiliated fund risk, collateralized loan liability risk, non-diversified fund risk, new fund risk, leverage risk and liquidity risk. For more information about these and other Fund risks, see the “Principal Investment Risks” section of the Prospectus.
ETFs can trade at a premium or discount to net asset value. Shares of an ETF are bought and sold at market prices (not net asset value) and are not individually redeemed from the fund. Broker commissions reduce returns.
Past performance is no guarantee of future results.
Collateralized Loan Obligations (“CLOs”) are structured products that issue different tranches with different levels of risk and are backed by an underlying portfolio consisting primarily of corporate loans rated below investment grade. Investments in CLOs involve risks similar to other credit investments, including interest rate risk, credit risk, liquidity risk, prepayment risk and the risk of default on the underlying assets.
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