Navigate a Challenging Fixed Income Environment With CLOs
In a tricky fixed income environment marked by high interest rates and ongoing monetary policy uncertainty, collateralized loan obligations (CLOs) are emerging as a strategic alternative. However, investors shouldn’t blindly assume a passive fund will provide them with the necessary exposure to CLOs. Instead, there are active options to consider such as the Reckoner Yield Enhanced AAA CLO ETF (RAAA) and the Reckoner BBB-B CLO ETF (RCLO).
See more: CLOs Emerge as a High-Conviction Option Amid Steady Inflows
Structural Advantages
Unlike traditional bonds that are highly sensitive to rate changes, CLOs offer a unique structural advantage in that they are floating-rate instruments. Additionally, CLOs offer investors exposure to the senior-secured portions of corporate capital structures. Reckoner Capital’s ETFs allow investors to maintain income levels without the downward price pressure seen in fixed-rate bonds when yields rise.
The primary appeal of CLOs in this climate is their inherent structure against interest rate volatility. Because the coupon payments on the underlying leveraged loans adjust periodically based on short-term market rates, CLO distributions can reset higher when rates rise. This mechanism provides investors with a natural hedge, effectively helping to mitigate duration risk — the risk that rising rates will cause the price of a bond to fall. Consequently, CLOs have historically demonstrated lower price sensitivity to interest rate shifts compared to longer-duration investment-grade corporate bonds.
Beyond their rate-sensitive structure, CLOs also benefit from robust, built-in credit seniority. Each CLO pools hundreds of diversified loans, which are subject to rigorous collateral and interest coverage tests. If these performance metrics fall below certain thresholds, the cash flows are then redirected to prioritize the senior-most tranches. This helps to shield investors from potential defaults.
The Active Advantages
As mentioned, RAAA and RCLO are actively managed funds that provide investors with the flexibility to navigate a nuanced and complex CLO market. As opposed to dabbling in CLOs due to their rising popularity, Reckoner Capital has the experience and is a CLO specialist. These funds add the requisite expertise that dedicated CLO practitioners bring.
As opposed to blindly buying the assets found in an index, Reckoner Capital’s active managers construct fund portfolios by performing rigorous research. They evaluate underlying manager tiers, collateral quality, and aggregate bid depth to protect daily net asset value (NAV) liquidity. This micro-level analysis allows portfolios to side-step capital-constrained issuers while also seeking to maximize risk-adjusted returns.
For more information on RAAA, click here, and for additional information on RCLO, click here.
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Important Information
Carefully consider the fund’s objectives, risks, charges, and expenses before investing. The prospectus at www.reckoner.com/raar provides the full details. Read it carefully before investing. Investing involves risk including the risk of principal loss.
The fund’s principal investment risks include management risk, novel structure risk, affiliated fund risk, collateralized loan obligation risk, non-diversified fund risk, new fund risk, leverage risk, and liquidity risk. For additional information about these and other fund risks, please refer to the “Principal Investment Risks” section of the prospectus.
ETFs may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market prices (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.
Past performance is no guarantee of future results.
Collateralized Loan Obligations (“CLOs”) are structured products that issue different tranches, with varying degrees of risk, which are backed by an underlying portfolio consisting primarily of below investment grade corporate loans. Investments in CLOs presents risks similar to those of other credit investments, including interest rate risk, credit risk, liquidity risk, prepayment risk, and the risk of defaults of the underlying assets.
Distributor: Quasar Distributors, LLC.
