Reckoner CEO on Rise of CLO ETFs

John Kim, chief executive of Reckoner Capital, told a recent webcast that exchange-traded funds have made collateralized loan obligation exposure available to individual investors and registered investment advisors. He cited the senior secured nature of the underlying loans, low historical default rates for some CLO tranches and Reckoner’s two CLO ETFs as reasons for broader access.

CLOs are structured from pools of broadly syndicated, floating-rate senior secured corporate loans. These loans typically hold first-lien claims on a borrower’s assets, which places them at the top of a corporate capital structure. Standard CLO portfolios generally include 150 to 300 loans spread across many sectors and are governed by diversification rules designed to limit concentration.

Kim noted that the credit risk in a CLO structure is anchored to those senior secured loans even for investors in lower-rated tranches. “You’re still only taking risks on senior secured loans at the end of the day,” he said during the webcast, distinguishing CLOs from securitized products that include lower-priority or unsecured assets.

Historically, CLO tranches have traded at wider spreads than similarly rated corporate bonds. Kim described that spread gap as a complexity premium rather than evidence of greater underlying credit risk. He cited historical data compiled by S&P showing a cumulative default rate of zero percent for AAA-rated CLO bonds since 1996. He also referenced data for the post-2010 era commonly called CLO 2.0, where BBB-rated CLO tranches recorded a zero percent default rate through 2025.

Reckoner launched two active CLO ETFs last year to offer liquid, transparent and tax-efficient access to the asset class. The firm’s products are the Reckoner Yield Enhanced AAA CLO ETF, ticker RAAA, aimed at AAA-rated tranches, and the Reckoner BBB-B CLO ETF, ticker RCLO, which targets BBB- to B-rated tranches. Kim said the ETF structure allows advisors and retail investors to gain exposure to portfolio bonds without buying individual CLO tranches directly.

Kim described Reckoner’s role in sourcing and managing CLO exposure as involving tranche-level due diligence, ongoing monitoring of fund holdings and tactical adjustments to reflect market conditions. The firm presents the funds as a way to diversify monthly income streams within a fixed-income allocation.

The CLO market has developed over three decades, with structural changes after the 2008 financial crisis and underwriting and covenant changes around 2010 often referred to as CLO 2.0. The emergence of pooled products such as ETFs has broadened access to CLO exposures beyond traditional institutional investors, according to the webcast discussion.