CLO ETF market grows to $19bn
The collateralised loan obligation (CLO) exchange traded fund (ETF) market has grown to a value of more than $19bn since its launch four years ago.
New research by S&P Global Ratings found that strong demand for CLO ETFs has fuelled rapid growth in the market since the first CLO ETF was launched in 2020.
The ratings agency said that these funds have injected new liquidity into CLO primary and secondary markets and granted retail investors access to securities previously available only to institutional buyers.
S&P revealed that Janus Henderson Investors is now the top player in the space by a wide margin, with its two ETFs representing approximately 82 per cent of total US CLO ETF assets under management.
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S&P’s research found that there are 13 CLO ETFs on the market at present, with five more currently in the planning stage.
The report suggested that CLO ETFs are likely contributing to the current spread tightening and liquidity of CLO tranches.
“For now, CLO ETFs are unlikely to exacerbate volatility in the case of a distressed CLO market because of the inherent decoupling between ETF investor share sales and CLO sales from the ETF’s portfolio,” said the report’s authors Kohlton Dannenberg and Tom Schopflocher.
Dannenberg and Schopflocher added that if the CLO ETF market continues to grow at its current pace, it is possible that CLO ETFs could have a negative impact on CLO tranche pricing in the case of a severe market dislocation.
“Some market participants believe steady demand from ETFs will reduce CLO tranche spread volatility – especially among mezzanine tranches – and growing demand from ETFs has probably helped drive some of the CLO spread tightening we’ve seen this year,” they said.
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“During periods when traditional CLO primary market buyers (e.g. US bank treasury departments, Japanese banks, and US insurance companies) disengage, CLO ETFs could make up for their (temporary) market absences and provide issuers with greater opportunities to place notes and execute their issuance pipelines.
“In addition, ETFs could influence primary market pricing to some extent if they are acting as anchor buyers, and they may provide secondary market buyers and sellers of CLO notes with a stable source of liquidity, facilitating improved transparent price discovery and higher routine trade volume.”
The report concluded that the CLO ETF sector remains untested in a significant economic downturn, and could face some uncertainty if the Fed keeps cutting rates.
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