Investors seeking short-term yield in a high-rate environment may consider collateralized loan obligations, or CLOs, which provide higher returns than traditional money market funds.
Money market accounts remain a popular option for cash reserves, though their yields often fail to match inflation. CLOs bundle senior secured corporate loans and adjust their coupons quarterly based on the Secured Overnight Financing Rate. This structure helps protect against losses if borrowing costs remain high.
The loans typically go to companies with lower credit ratings, but the securitized structure ensures senior tranches are repaid first. That priority reduces default risk compared to direct high-yield bond investments.
Two ETFs simplify access to CLOs
The Reckoner Yield Enhanced AAA CLO ETF (RAAA) focuses on the safest segment of the CLO market. AAA tranches hold the highest repayment priority, meaning investors receive payments before others if loans in the pool default. The fund balances yield with strong credit protection.
Investors willing to accept additional risk for greater returns may prefer the Reckoner BBB-B CLO ETF (RCLO). This fund targets lower-rated tranches, which offer higher yields but also face more credit risk. Even these tranches, however, remain senior to most corporate bonds, limiting potential losses compared to direct high-yield investments.
Reckoner Capital CEO John Kim explained in a webinar that BBB and BB tranches might seem riskier at first glance. “But you’re still only exposed to senior secured loans,” he noted.
Both funds use active management, allowing the structured credit team to adjust holdings as market conditions change. This flexibility helps capture value while maintaining liquidity through the ETF structure.
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Retail investors gain access to institutional-grade credit strategies without the complexity of direct CLO ownership. The ETF format also eliminates lock-up periods and high minimum investments common in private credit funds.
CLOs carry risks, including management risk, liquidity risk, and potential losses from loan defaults. Shares may trade at a premium or discount to net asset value, and brokerage fees can reduce returns.
Investors who have relied on money market funds for stability may see CLO ETFs as a logical next step. The floating-rate feature aligns with current interest rates, while the senior secured loans offer more protection than high-yield bonds.
The strategy suits those with a longer time horizon and comfort with volatility. Even AAA tranches can experience price swings during market stress. Investors needing immediate cash access may still prefer the liquidity of money market funds.
The prospectuses for both funds are available at reckoner.com/raaa and reckoner.com/rclo. These documents outline all risks, including the possibility of principal loss.
For those tracking disruptive innovation trends, CLO ETFs represent another way to diversify beyond traditional fixed-income assets.
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