Specialized Bond ETFs Are Taking Off as Janus Fund Tops $1 Billion and More Line Up

(Bloomberg) -- A niche corner of the fixed-income ETF industry is growing quickly as investors and issuers alike turn to high-grade debt with the potential to outperform in the interest-rate storm. 

The Janus Henderson AAA CLO exchange-traded fund (ticker JAAA), backed by top-rated bonds known as collateralized loan obligations, hit a record $1.2 billion of assets this week after launching in October 2020. Meanwhile, the pipeline is building: Applications for the AXS First Priority CLO Bond ETF and the VanEck CLO ETF landed with U.S. regulators last month, with the AXS fund representing an acquisition of the AAF First Priority CLO Bond ETF (AAA). 

The first CLO ETFs were greeted warily by some industry officials concerned about liquidity of the underlying assets, but they've proved popular as inflation surges and interest rates rise. CLOs are backed by leveraged loans, which pay floating rates -- meaning they usually generate more income when yields are broadly rising. 

Those higher yields are a positive for investors now, but could also translate to more companies struggling to make interest payments, potentially hurting loans over time, analysts including Michael Anderson wrote in a Thursday note focusing on the U.S. leveraged loan market.  

But for now, floating rates combined with the fact that JAAA holds top-rated CLOs are an attractive proposition for investors as the Federal Reserve's hiking cycle gets underway, according to Family Management Corp.'s David Schawel. Loans have been gaining all week, according to S&P/LSTA Leveraged Loan Price index data through Thursday.  

“Rates have been rising rapidly, so this is a way to pick up some low duration spread with the benefit of higher credit quality from structure,” said Schawel, the firm's chief investment officer.

JAAA has dropped about 0.6% so far in 2022, compared with an 8.6% plunge in the $34 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). The $79 million Janus Henderson B-BBB CLO ETF (JBBB) -- which invests in CLOs lower down the credit-rating scale -- has fallen about 1.8% since launching in mid-January.

The AXS fund will invest primarily in top-tier rated CLOs and charge an expense ratio of 0.25%, matching JAAA's fee. The VanEck offering, which doesn't yet list a fee, would hold CLOs rated between AAA and BBB- securities. 

©2022 Bloomberg L.P.