JAAA: Biggest And Best AAA CLO ETF Despite Many New Active Ones Recently Issued

seekingalpha10-19

2024 has seen a record-breaking launch of over 300 actively managed ETFs, spurred by the SEC's 2019 Rule 6c-11.Janus Henderson AAA CLO ETF, a top-performing AAA-rated collateralized loan obligation ...

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Bicho_raro/iStock via Getty Images As a now retired income investor focused on high yield, monthly distributions for my retirement portfolio, I have begun to rotate some of my holdings into more actively managed ETFs. My recent coverage of several new covered call ETFs got me interested in seeing how many other actively managed ETFs have been launched this year. As it turns out, 2024 is likely to be a record-breaking year, with new US ETFs being launched at a record pace. In fact, according to this report from Morningstar, 2024 has been a breakout year for active ETFs. While active ETFs have been around for almost two decades, they didn’t start to take off until a key 2019 regulatory change. The SEC’s Rule 6c-11, commonly referred to as the “ETF Rule,” spurred much of the innovation, by streamlining the ETF approval process and permitting custom security baskets. More than 300 active ETFs were launched in 2024 through September.   Morningstar While most of those (about 75%) were equity and alternative (e.g., covered call, crypto, etc.) active ETFs, the other 25% were mostly fixed income ETFs. One thing that caught my eye in the Morningstar report was the top active ETFs by estimated net flows.   Morningstar While I was not surprised to see JEPQ in the #2 spot, I was surprised to see Janus Henderson AAA CLO ETF (NYSEARCA:JAAA) in 3rd place with estimated net flows of over $7B. While the risk/reward is entirely different for each of those ETFs, a more conservative, risk-averse income investor might prefer JAAA. This is due to its healthy 6.4% yield and strong preservation of capital, making it a better than cash income holding with not a lot of additional risk. Even if interest rates fall further and the yield for JAAA declines with those falling rates due to its floating rate AAA-rated collateralized loan obligation, or CLO, holdings, income investors should allocate a reasonable portion of portfolios to JAAA. This is to protect against a sudden downturn in the economy. Furthermore, if inflation reignites and causes equity prices to fall, fixed income holdings like JAAA should continue to provide steady income with little loss of capital relative to equities or other fixed income holdings such as corporate bonds. JAAA Overview and Outlook JAAA invests at least 90% in AAA-rated CLO holdings, which have been on fire in 2024. In fact, this recent Wall Street Journal article discusses the numerous new CLO ETFs that have been or are about to be launched in 2024. The funds mark the latest effort to bring a hot Wall Street product within reach of ordinary investors. CLO sales have been rising fast: Firms such as Ares Management and Blackstone have logged around $147 billion in sales this year, compared with $87 billion during the same period last year, according to PitchBook LCD data through Oct. 11. CLOs have been one of the top-performing fixed-income investments in 2024, with yields at their highest levels in decades and a growing economy easing fears of a wave of corporate defaults. Now, money managers are betting the ease of buying and selling ETFs will attract more individual investors. From the Wall Street Journal market data, below is a snippet of the JAAA overview showing the net assets at $12.56B (now $13.5B as of 10/17/24) and 266.5M shares outstanding. The inception date for JAAA was October 2020.   Wall Street Journal From the JAAA website, there are several reasons to invest in JAAA. These include the high quality of the AAA-rated CLO asset class, risk management during times of market volatility, and an efficient ETF structure providing liquidity and exposure to CLOs for individual retail investors that would not otherwise be available.   JAAA website In the Q3 2024 JAAA fund commentary from Janus Henderson, the manager outlook suggests that AAA CLOs remain an attractive fixed income investment opportunity despite lower rates. While the Fed has begun its rate-cutting cycle, the cadence thereof remains an open question. Should we continue to see robust economic data, the pace of interest rate cuts may be slower than the market anticipates. Further, markets anticipate that the terminal federal funds rate will settle around 3%, which will maintain attractive yields for AAA CLOs. We believe high-quality floating-rate exposure is a key component of a strategy to navigate the economic and monetary environment, and taking advantage of the yield available at the front end of the yield curve through AAA CLOs remains one of the most attractive spots in fixed income. To further explain why AAA rated CLOs make sense in a declining interest rate environment, this insight from Janus Henderson discusses what makes them a compelling investment opportunity.  We believe investors should maintain diversification within their fixed income portfolios throughout the interest rate cycle. Therefore, in our view, an allocation to short duration remains highly relevant in the current environment, particularly considering how attractive short-term yields are. Further, optimizing total return for one’s entire portfolio is vital to improving long-term risk-adjusted returns. As such, we believe a strategic allocation to AAA CLOs, with their attractive floating-rate yields, high credit quality, and low correlation to other fixed income sectors, remains a key component of a strategic fixed income allocation.  Comparison to Other AAA-rated CLO ETFs As I mentioned in the introduction, there have been quite a few new actively managed ETFs launched in the past couple of years, including several others that also hold AAA-rated CLOs. From Blackrock, the iShares AAA CLO Active ETF (CLOA) was launched in January 2023 and currently has about $500M in AUM and currently yields just over 6%. The Invesco AAA CLO Floating Rate Note ETF (ICLO) launched in December 2022 and has about $170M in AUM while yielding 7.2%. The PGIM AAA CLO ETF (PAAA) yields 6.3%, has $785M in AUM and was formed in July 2023. The Panagram AAA CLO ETF (CLOX) is by far the smallest at $77M in AUM, yields 6.2% and started up in July 2023 also. Comparing total returns of each of the five shows that JAAA had the best return (just slightly) at 8.13%. It is also by far the biggest of the bunch (with $13.5B in AUM), and that fact alone gives me confidence in recommending it above the others listed here.   Seeking Alpha Summary: Consider JAAA For Reliable Fixed Income, Portfolio Diversification, and Capital Preservation Summarizing this thesis, I believe that JAAA deserves a spot in any income investor’s portfolio due to its strong performance relative to other fixed income investments, and one that also offers capital preservation in times of extended market volatility. From the Q3 2024 fund commentary, the market outlook for AAA-rated CLOs remains positive, with the strength of the US economy continuing to support new CLO issuance. The portfolio managers are well positioned to take advantage of the current market environment, regardless of the pace of rate cuts. We believe that strong fundamentals, including the favorable macroeconomic environment and reasonable leverage levels, continues to support AAA CLO valuations. Strong demand technicals – driven by attractive overall yields and money flows into CLOs – further support current spread levels. We witnessed ongoing strong demand for AAA CLOs during the quarter as more institutions reenter the market. Furthermore, we believe the roughly $6 trillion in money market and savings accounts presents an opportunity for ongoing investor interest and inflows into AAA CLOs. Supply remains another positive for the CLO market. We anticipate around $130 billion of net new issue in 2024 and continue to find attractive opportunities in the primary issue market.  I own some shares of JAAA in my Income Compounder portfolio and plan to add more over time as market conditions warrant. However, you should determine based on your unique investment objectives, time horizon, and risk tolerance whether JAAA might be a good fit for you.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2476241381"}