How to Invest in CLOs with ETFs

The Recker leveraged AAA CLO ETF, and the ticker is RAA. It is an actively managed exchange traded fund. It is designed to enhance yield on a diverse portfolio of AAA rated CLO bonds. What does this fund own, and what makes it a compelling solution for fixed income investors?

The fund will own senior AAA bonds from tier one managers in the market. If you look at the CLO market, there are about 130-140 managers in the US. A lot of them are issuing several deals a year. All of these deals will have a AAA tranche normally embedded in that structure.

We are going to go in and buy a diverse portfolio of AAA bonds. We underwrite the managers, we underwrite the loan pools, we underwrite the structures that the CLOs have financially in their structure. So what we are trying to do is pick the best of the best, pick the safest bonds, and the most liquid bonds because, of course, in an ETF wrapper, liquidity is key.

You really want to be able to sell your portfolio in one day if you need to because it is a daily fund. So we are very highly concentrated on finding bonds with a lot of bid depth in the market, meaning there are a lot of buyers for these bonds. Managers that are really name brand managers have a long track record and history of selecting good assets to back their bonds and enough diversity to make it such that you are not taking risk on any individual name or any individual structure.

So it's very important that we select in a way that creates diversity for the investors, so that if you buy one share of our ETF, you are getting access to all of those diverse portfolio benefits. You have not only manager and bond diversity, but also the underlying assets, which are very diverse.