On the latest ETF 360, VettaFi’s Cinithia Murphy talked to Reckoner Capital Management’s John Kim. The two discussed CLOs and the Reckoner Leveraged AAA CLO ETF (RAAA).
Alternative Credit on the Rise
Kim shared that for a long time, the fixed income options available to most individual investors was fairly standard. Institutional investors, however, saw another whole world of options. “Some of what used to be more ‘exotic options’ were actually better investments,” He noted. “CLO bonds are good example of that. They’ve had wider spreads than standard corporates, but they’ve also had better default and loss performance.”
AAA CLOs: Is the Market Saturated?
Murphy observed that though CLOs are relatively young as ETFs, there are a lot of new entrants, particularly in the AAA category. Asked if he thought they had reached saturation, Kim said that certain strategies have gotten to a place where they don’t need many more options. ”I do think there’s a certain point at which the market doesn’t need a ton of new options… Unless they are bringing something new to the table,” he said.
Kim on Leveraging Leverage
CLOs are new, and Kim sees significant room for growth. Hence RAAA. Asked about its differentiator, He said “Our fund did bring one new thing to the market: a turn of leverage on the portfolio.”
Kim stressed that this is a modest amount of leverage intended primarily to enhance the yield. Instead of getting four or five turns of leverage — which banks will do given the robust nature of CLOs — he is sticking to one turn of leverage with RAAA. “What we’d like to do is take an asset class that we already feel is very, very strong, great spreads, great asset performance history, and just use a technique that is very commonly used in institutional markets and bring that to wealth managers and individual investors,” Kim explained.
When times are benign, he says RAAA can ramp up the leverage, if needed. “Effectively, you’ll have more assets working for you at those times to produce yield,” he noted. When things get rocky, Reckoner plans to bring down the leverage levels.
The Reckoner Difference, According to Kim
Kim said his firm is focused on alternative credit, and many of his colleagues have spent a large portion of their careers on CLOs. “We know CLOs very well. We’ve been on all sides of the trade.”
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