ETF CLO growth gathers pace as firms ramp up offerings

Demand for floating rate assets with robust surplus yield outlook is driving ETF (exchange-traded fund) CLO growth, according to asset manager Janus Henderson, with firms ramping up their offerings.

In July, Janus Henderson B-BBB CLO ETF (JBBB) surpassed $1 billion in AUM (SCI 15 July). This was followed two months later by Palmer Square Capital launching two ETFs (SCI 12 September), one of which exclusively focusing on CLOs. 

According to analysis published by PGIM shortly before these developments, CLO ETF assets under management had – at the time – almost quintupled in value since 2023, reaching more than US$11bn.

John Kerschner, head of US securitised products and portfolio manager at Janus Henderson, tells SCI the growth of the ETF CLO market and the continued attractiveness of CLOs for banks are contributing to favourable market conditions. 

"Changes in capital requirements for high-quality floating rate assets like CLOs are expected to support the CLO market further,” he says. “Looking ahead, we anticipate a strong year for CLO issuance in 2024, albeit not as robust as 2021."

Kerschner notes that following the success of the VNLA ETF in 2016, the company introduced JAAA, one of the first CLO EFTs. Building on JAAA success, the company launched JBBB in January 2022 and introduced JSI, Janus Henderson's Securitized Income ETF, last November (SCI 21 August 2023).

"I believe the demand for ETFs will continue to grow. In particular, JBBB was launched based on the success of JAAA,” Kerschner says. “We were confident that CLOs belonged in an ETF wrapper. Many investors interested in JAAA were looking for something with a little more yield further down the capital structure, even though it comes with added volatility.” 

Kerschner highlights JBBB was introduced to cater investors who could handle more volatility but wanted a higher yield. "Despite the unfavourable timing of JBBB's launch in January 2022, just four weeks before Russia invaded Ukraine, causing market dislocations and volatility, we were able to build a track record for the ETF," he adds.

Kerschner also notes that, whilst there are already concerns about cracks within the corporate credit market, uncertainties in the US and European economies are also contributing to a somewhat turbulent market. 

In relation to CLO activity Kerschner says he expects new issuance and reset pace to remain steady. "This trend is likely to continue until the end of the year, with many attributing the rush to the upcoming US election and concerns about potential market volatility,” he says. “Despite this, there is still significant interest in this space, particularly for floating rate assets tied to the short end of the yield curve. We believe there is room for growth in this market due to the higher yields compared to other investment options.”

However, Kerschner adds that as the market matures, he expects the rate of growth to slow down. "The market for CLOs has seen record-breaking issuance this year. A significant portion of the CLO market is entering its reinvestment period, leading to increased pay downs and reinvestment of funds back into the CLO market.”

Camilla Vitanza