Nuveen, the investment manager of TIAA, has launched a new actively managed fixed income ETF designed to provide exposure to collateralized loan obligations (CLOs) at the lower end of the investment-grade spectrum.
Jeff Carlin, Head of Global Wealth Advisory Services at Nuveen.
The Nuveen AA-BBB CLO ETF (NCLO US) has been listed on the New York Stock Exchange with an expense ratio of 0.25% and approximately $70 million in initial assets.
CLOs are floating-rate debt securities issued in tranches by a trust or special purpose vehicle, backed by an underlying portfolio of loans. These loans, selected by a CLO manager, typically include domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, most of which are below investment grade.
Despite this, CLO tranches often receive investment-grade ratings due to the benefits of diversification, credit enhancements, and cash flow subordination.
Lower-rated, investment-grade CLO tranches carry higher credit risk compared to their AAA-rated counterparts, but offer the potential for greater yields to compensate for the increased risk.
Historically, CLOs have provided fixed-income portfolios with diversification and protection against interest rate-driven volatility due to their floating-rate coupons. They tend to deliver enhanced income compared to similarly rated corporate debt. At the same time, higher-quality CLO debt benefits from historically low default rates which have remained negligible over the past 30 years and are significantly lower than those of comparably rated corporate bonds.
Jeff Carlin, Head of Global Wealth Advisory Services at Nuveen, commented: “To complement traditional income portfolios, and with increased awareness of the robust yields and lower historical defaults of CLOs, we’re seeing significant demand among our clients for this attractive alternative credit allocation.”
While the Nuveen AA-BBB CLO ETF will compete with several existing active ETFs that also target CLOs beyond those with the highest ratings, the fund stands out for its competitive expense ratio of 0.25%. Comparable offerings include the $500 million Panagram BBB-B CLO ETF (CLOZ US) with an expense ratio of 0.50%, the $60m VanEck AA-BB CLO ETF (CLOB US) at 0.45%, and the $1.4 billion Janus Henderson B-BBB CLO ETF (JBBB US), which charges 0.49%.
Investment Approach
The ETF is managed by Himani Trivedi, Head of Structured Credit, and Joshua Grumer, Associate Portfolio Manager and Research Analyst. Together, they harness the expertise of Nuveen’s leveraged finance investment team, consisting of 40 professionals managing over $43bn in assets under management (AUM), of which $17.8bn is in the CLO platform.
The fund seeks to deliver a high level of current income and total return by investing in CLO tranches rated AA+ to BBB- with a particular emphasis on those rated in the A segment. To enhance its return potential, the ETF may allocate up to 10% of its assets to non-investment-grade CLOs rated BB+ to B-.
The fund only invests in US dollar-denominated CLOs with a minimum initial offering size of $250m, employing a relative value approach to select its holdings.
Risk controls are in place to manage exposure, limiting the fund to a maximum of 5% of its portfolio in any single CLO and no more than 15% in CLOs managed by the same CLO manager.