Investors Shift Into CLOs, Bank Loans for Yield

Bank loans and collateralized loan obligations attracted $218 million of investor inflows in March, bringing year-to-date net purchases to $4.21 billion, or 7.04% of combined assets under management, according to State Street Investment Management’s March ETF Flash Flows report.

The monthly inflow into loans and CLOs contrasted with outflows in other fixed-income sectors. The report showed roughly $6 billion of net outflows from credit-sensitive sectors in March. High-yield corporate bonds and emerging-market debt recorded about $7.4 billion of redemptions, and long-term government bond funds lost $2.7 billion as investors reduced exposure to long-duration, fixed-rate instruments.

Investors have been targeting bank loans and CLOs for their floating-rate characteristics. Bank loans and many CLO tranches pay interest that resets with benchmark rates, which can limit price sensitivity when policy rates remain elevated. CLOs pool leveraged loans and divide cash flows into senior and subordinated tranches; senior tranches represent higher-ranking, senior-secured claims within the capital structure.

Two exchange-traded funds that target CLO tranches are the Reckoner Yield Enhanced AAA CLO ETF (RAAA) and the Reckoner BBB-B CLO ETF (RCLO), which offer investors exposure to different tranche segments through active portfolio management.

CLOs and bank loan investments carry several risks. CLOs are backed mainly by below-investment-grade corporate loans and are split into tranches with varying risk and return. Returns can be affected by credit losses, defaults in the underlying loan pool, prepayments, liquidity conditions and shifts in interest rates. ETFs that invest in structured credit can trade at prices that differ from net asset value, and some funds may use leverage or hold concentrated positions, increasing volatility.

The flow data arrived as markets weighed a higher-for-longer interest-rate outlook driven by persistent inflation and central bank guidance. Some investors have moved funds from long-duration bonds into floating-rate credit as they seek income with lower sensitivity to rising yields.