In an increasingly crowded field, Nuveen, the investment manager of TIAA, has launched an exchange-traded fund (ETF) pooling collateralized loan obligations (CLOs) that is focusing on CLOs' single A rated bonds, a segment other CLO ETFs have largely overlooked.
S&P Global recorded 13 CLO ETFs with a total of $19 billion in assets under management that had launched as of November 26, when it published a report about the market segment's growth and potential impact on the broader CLO market.
Another five were planned at that time, including Nuveen's; a European CLO ETF from Janus Henderson, which currently manages the largest CLO ETF in the U.S.; and new entrants such as Virtus and BondBLoxx.
In September, VanEck along with PineBridge launched a CLO ETF investing in broadly syndicated loans (BSLs) rated between AA and BB—the only other one with a focus similar to Nuveen's—that as of late November had collected $51 million in assets. Most other CLO ETFs concentrate on the AAA and BBB segments, with the largest, the Janus Henderson AAA CLO ETF (JAAA) contributing $15 billion to the overall CLO ETF market.
Nuveen's ETF launched December 10 and is slated to invest in loans rated between AA and BBB.
Himani Trivedi, head of structured credit at Nuveen, including the Nuveen AA-BBB CLO ETF (NYSE: NCLO) as well as the 38 CLOs that Nuveen currently manages, said the asset manager chose to focus on the A rated segment in part because it is less crowded and because it offers "a great balance" of risk-adjusted return.
"If you look at the history of AA to BBB, the impairments have been negligible, and it still offers a much better coupon and excess spread compared to AAA," Trivedi said. "So when rates go lower and investors start reassessing when they can get more yield, this middle part of the capital structure provides that excess coupon, and on a risk-adjusted basis it has plenty of subordination."
Currently, said Trivedi, the average spread of the A rated portfolio, provides a pickup of 75 bps to 80 bps and as high as 100 bps over AAA portfolios, depending on market conditions. In addition, the A rated bonds have subordination of 18% that, while less than 36% for AAAs, nevertheless requires a significant percentage of the portfolio to default with zero recovery for the CLO to suffer losses. That has not been the case historically, she said, adding that recoveries have been closer to 60%over the long-term.
"The way to compare single-A and BBB, is that while BBBs have similarly not seen significant impairment, BBB bonds have significantly more volatility than single-A," said Trivedi, who will be managing the CLO ETF along with Joshua Grumer, senior director at Nuveen.
She anticipates Nuveen's CLO ETF to be attractive to both retail and institutional investors, who are likely to view the asset class as heavily protected by significant subordination, and comparable to cash but with attractive yield premiums. In addition, the CLO ETF market, while approximately $20 billion, is still a tiny fraction of the roughly $1 trillion CLO market.
"It's still very small and just getting started," she said.
