VanEck’s Collateralized Loan Obligation ETF (CLOI) offers investors access to investment-grade CLOs, providing a unique blend of higher yields, lower default rates, and protection against rising interest rates. In an interview, VanEck’s Bill Sokol highlights how CLOI fits into a diversified fixed income strategy, leveraging PineBridge Investments’ active management to navigate market shifts while enhancing portfolio yield and quality.
The evolution of exchange-traded funds (ETFs) has transformed the way advisors approach fixed income, offering increasingly sophisticated products to meet the demands of today’s market. Among the leaders in the industry is VanEck, a pioneer in ETF innovation, particularly with its Collateralized Loan Obligation ETF (ticker: CLOI), a fund designed to provide access to investment-grade collateralized loan obligations (CLOs). In an interview with The Wealth Advisor’s Scott Martin, Bill Sokol, Director of Product Management, shared insights into the intricacies of CLOs and why they represent a compelling opportunity for advisors seeking yield, quality, and diversification in an evolving financial landscape.
What Are CLOs?
Collateralized loan obligations, or CLOs, are securitized portfolios of leveraged loans. CLOs typically hold 200 to 300 individual loans, which are then divided into multiple tranches of debt. These tranches vary in seniority and risk, allowing advisors to choose the level of risk their clients are comfortable with. The senior tranches—such as AAA-rated ones—carry lower risk, while lower-rated tranches offer higher potential returns but come with greater risk. This structure is what makes CLOs so versatile for advisors and investors alike.
Sokol explains, “Investors in the more senior tranches, which is where CLOI focuses, receive interest and principal payments first, with the benefit of having more junior tranches to absorb any losses.” CLOs are designed with built-in risk protections—like over-collateralization and active management—which have historically led CLOs to experience lower default rates than bonds or loans with similar ratings. The added benefit? CLOs tend to provide a unique combination of higher yields and lower risk, making them a strong addition to fixed income strategies.
The Role of Active Management
One of the defining characteristics of the CLO market is its complexity, which is why an active management approach is essential for navigating it successfully. The fund is actively managed by PineBridge Investments, an experienced firm that has been navigating the CLO space for decades. Their expertise allows them to assess the nuances of each CLO they invest in, ensuring that every tranche selected for CLOI aligns with VanEck’s broader investment goals.
“PineBridge has been in this market for a very long time as both a CLO manager and an investor in CLO tranches,” Sokol explains. “They do due diligence on every CLO they purchase. They look through to the underlying loans of every CLO. They benefit from having a very large leveraged finance team and a lot of resources, including a credit analyst team that allows them to do that.”
Active management is critical because CLOs, despite similar ratings, can perform inconsistently. “Even if you have two CLO tranches with the same rating, they can behave very differently, first because of the portfolio of loans, but also when the CLO is issued,” Sokol says. “Every CLO is actively managed, so you need to understand the CLO manager’s style as well.”
This expertise allows PineBridge to invest across the CLO capital structure, adjusting the portfolio based on market conditions. “They decide where they want to invest within the CLO capital structure,” Sokol notes. “They focus on investment-grade tranches, but that can be anywhere from AAA to BBB. And depending on the environment that we’re in, different opportunities may present themselves.”
Positioning CLOI in a Shifting Economic Landscape
As the macroeconomic environment continues to evolve, CLOI’s ability to adjust to changing conditions makes it an attractive option for fixed income investors. According to Sokol, PineBridge has taken a conservative approach to the current market, emphasizing higher-quality tranches while selectively taking on risk where appropriate.
“Right now, the portfolio is positioned pretty conservatively,” Sokol says. “They’re taking selective risk, but it is overall quite conservative. The rationale is that right now we seem to be in a pretty stable environment from a macroeconomic perspective. Growth has been pretty good, maybe surprisingly so over the last few years, and corporate credit has been very strong. Their view is that we’re kind of in this range-bound environment, which allows you to again selectively take more risks to capture the higher carry that you can get outside of AAA only.”
However, Sokol also notes that while the economic environment has been stable, higher interest rates are starting to have an impact, particularly on corporate borrowers. “They do expect that the impact of higher rates will materialize in corporate fundamentals,” he says. “Loan borrowers are, of course, paying much higher rates now than they were a few years ago, and that will have an impact.”
In light of these concerns, Sokol emphasizes the importance of staying focused on quality. “When you have tight valuations and you have uncertainty ahead, that does support going higher up in quality,” he says. “And really focusing on that bottom-up security selection to make sure that you can add value through that due diligence of every investment you make.”
CLOs: A Unique Value Proposition in Fixed Income
For advisors seeking to enhance the yield of their clients’ fixed income portfolios, CLOs offer a compelling solution. Historically, they have provided higher yields than similarly rated bonds, along with lower default rates and the added security of a structured portfolio. CLOs also benefit from being floating-rate instruments, which means they offer protection against rising interest rates—a key advantage in today’s economic environment.
“CLOs have performed remarkably well,” Sokol points out. “When you look at default rates, especially the ones issued after the financial crisis, there’s never been any default in any investment-grade tranche.” This strong performance, according to Sokol, is due to the structural protections of CLOs, including their multi-tranche design and active management.
Sokol adds that CLOs are often confused with collateralized debt obligations (CDOs), which gained notoriety during the Global financial Crisis of 2007–2009. However, the two are fundamentally different. “CLOs performed very well through and in the years following the financial crisis, which is sometimes surprising for many investors when they hear CLOs—they confuse it with CDOs.”
In fact, Sokol adds, “If you look at CLOs issued, especially the ones after the financial crisis, there’s never been any default in any investment-grade tranche.” The robust performance of CLOs during times of economic stress is one of their strongest selling points. While many securitized products were severely impacted by the financial crisis, CLOs proved their resilience, in part due to their structure and active management.
Enhancing Yield and Managing Risk
For advisors looking to diversify fixed income holdings, CLOs can serve as a valuable complement to traditional bond investments. They provide both additional income and help to manage interest rate risk.
“The benefits you get are higher yields and spreads versus bonds and loans with the same rating and then the lower default rates that we’ve seen historically,” Sokol explains. He also highlights that CLOs’ floating-rate structure adds another layer of diversification, especially in a rising rate environment: “CLOs behave differently because of their higher spread from the loan exposure but also because they’re floating rate.”
Sokol believes CLOs are well-suited for inclusion in a core bond portfolio, offering both diversification and yield enhancement. “We think that really supports the case for an allocation within a core investment-grade bond portfolio because you’re getting the yield pickup, and you’re actually getting higher quality than what you see in, for example, the investment-grade corporate market.”
The Case for Adding CLOI to a Portfolio
So where does CLOI fit within a broader investment strategy? Sokol suggests that CLOs can serve multiple roles, depending on your client’s goals and existing portfolio structure. For those seeking yield enhancement in a core bond portfolio, CLOs offer higher yields and spreads than similarly rated bonds, along with lower default rates.
For investors already exposed to leveraged loans, CLOs also offer a way to de-risk without sacrificing yield. “If you do think that we’re going to see volatility or higher default rates ahead in the loan market, the CLO structure can provide protection against that,” Sokol explains.
At the same time, CLOs should not be seen as a replacement for all other fixed income instruments. Sokol emphasizes the importance of diversification: “I think diversification is always probably the best approach in your portfolio, especially in your core portfolio. There is a place for fixed coupon bonds, and whether we’re talking about risk-free treasuries or corporate bonds, but what you don’t get there is the higher yield which you get with CLOs.”
The Future of CLOI
Looking ahead, VanEck’s CLOI is well-positioned to continue delivering value to advisors and their clients. Its active management, flexible investment approach, and ability to navigate changing market conditions make it an attractive option for those looking to enhance their fixed income exposure.
CLOI offers a compelling solution for advisors seeking to balance yield and quality in their clients’ portfolios. As Sokol notes, “We think an active approach and one that can invest broadly throughout the capital structure of a CLO can provide the best opportunities.” With the flexibility to adapt to economic shifts and the expertise of PineBridge Investments guiding the fund, CLOI stands out as a forward-thinking innovation in the world of ETFs.
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