In the current macroeconomic landscape marked by higher-for-longer interest rates, investors looking to optimize their short-term capital allocations may want to consider collateralized loan obligations (CLOs) as a higher-yielding potential alternative to traditional cash proxies like money market funds. While money market accounts offer a viable and widely used alternative for parking cash, their yields may barely keep pace with inflation.
See More: Secure Yield in an Uncertain Market With The RAAA ETF
The AAA Alternative
CLOs bridge the gap between the traditional alternative money market accounts and higher-yielding corporate bonds by offering a higher yield premium potential. The underlying assets are senior secured corporate bank loans. Because of that, they feature an automatic floating-rate mechanism tied directly to the Secured Overnight Financing Rate (SOFR). If interest rates remain higher for longer, a CLO’s coupon resets quarterly, providing a hedge against duration risk.
For prospective fixed income investors looking at CLO exposure through the convenience of an ETF, they can start at the top of the capital stack with the Reckoner Yield Enhanced AAA CLO ETF (RAAA). AAA tranches represent the most senior tranche issued by a securitized pool of senior secured loans. Investors are paid first in the event of a default, offering greater credit seniority versus their corporate bond counterparts.
Reaching For Greater Yield Potential
For those seeking for more yield, another option is the Reckoner BBB-B CLO ETF (RCLO). RCLO focuses on BBB-B tranches that seek higher yields than senior AAA CLOs while maintaining significantly more structural seniority compared to high yield corporate bond options. As credit spreads tighten, RCLO is an option for investors who want to seek to outpace inflation in this higher-for-longer rate environment without taking on excessive corporate default risk.
“When you talk about a BBB or BB, the initial thought is ‘Oh, I’m going way down in the capital stack,'” said Reckoner Capital CEO John Kim when discussing CLOs in a webinar with TMX VettaFi. “But remember, you’re still only taking risks on senior secured loans at the end of the day.”
The common denominator of 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 provide 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 at www.reckoner.com/raaa orwww.reckoner.com/rclo 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.
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Facts Only
* CLOs bridge the gap between money market accounts and corporate bonds by offering a higher yield premium potential.
* CLO underlying assets are senior secured corporate bank loans.
* CLOs feature an automatic floating-rate mechanism tied to the Secured Overnight Financing Rate (SOFR).
* RAAA is a CLO ETF focusing on AAA tranches, representing the most senior tranche of a securitized pool of senior secured loans.
* RCLO focuses on BBB-B tranches seeking higher yields than senior AAA CLOs with greater structural seniority than high yield corporate bonds.
* Reckoner Capital manages these funds to identify relative value.
* Investing in CLOs involves risks including interest rate risk, credit risk, liquidity risk, prepayment risk, and default risk of underlying assets.
* ETFs may trade at a premium or discount to Net Asset Value (NAV).
Executive Summary
Full Take
The narrative positions structured credit products like CLOs as necessary tools for yield optimization in an environment where traditional cash alternatives underperform relative to inflation-adjusted returns. The framing deliberately introduces a spectrum of risk by presenting RAAA and RCLO as viable options, suggesting that the choice is one between maximizing yield (RAAA) or balancing yield with seniority (RCLO). This structure implicitly suggests that sophisticated investors can navigate credit risk effectively, framed by the assertion that the underlying assets are senior secured loans. The focus on active management by Reckoner Capital serves to build trust and reduce perceived uncertainty regarding complex structures. However, the text does a strong job of defining the risks inherent in the instruments—mentioning principal loss, credit risk, and liquidity risk explicitly, which acts as a necessary counterbalance to the yield-seeking pitch. The juxtaposition of senior AAA exposure versus BBB-B consideration highlights the inherent trade-off between safety and return, forcing the reader to weigh structural seniority against potential yield capture within the context of persistent high rates.
Bridge Questions: If SOFR remains high, how does the perceived hedge against duration risk in CLOs translate into actual portfolio performance across various economic cycles? What is the quantifiable difference in realized volatility between senior AAA tranches and BBB-B tranches under varying credit stress scenarios? Does the active management provided by structure experts sufficiently mitigate the systemic risks associated with underlying corporate defaults in volatile markets?
Sentinel — Human
The text functions as informative financial reporting, logically structuring the relationship between CLOs, interest rate environments, and specific investment vehicles while incorporating necessary regulatory disclaimers.