Some funds, when they launch, come out of the gate at the exact right time and have hot performance. The Panagram Bbb-B Clo ETF (NYSEARCA:CLOZ) is a quintessential example of this given its straight price line higher since inception. Is there still an opportunity for the CLOZ fund to continue to do well? The answer will depend on credit risk ultimately.
CLOZ is an actively managed exchange-traded fund, or ETF, that primarily invests in a diverse portfolio of BBB and BB-rated Collateralized Loan Obligation tranches. It seeks to offer investors a source of current income and capital preservation.
Collateralized Loan Obligations (CLOs) are a type of structured finance product backed by a pool of loans. These pools consist predominantly of below-investment-grade, corporate loans which are sliced into tranches with varying levels of risk and return. Investors purchase these tranches according to their risk appetite. The cash flows from the underlying loans-interest and principal payments-are distributed to investors in a sequence, starting with the senior tranches and moving down to the equity tranches, which are the riskiest. The structuring of tranches provides a degree of protection to higher-rated tranches against potential defaults.
Launched on January 24, 2023, the fund has an annual gross expense ratio and a net expense ratio of 0.50%, respectively. The benchmark for CLOZ is the JP Morgan CLO High Quality Mezzanine Index.
Understanding the CLOZ Fund’s Holdings
Top Individual Positions
CLOZ’s portfolio is composed of a mix of BBB and BB-rated CLO tranches. These tranches are created by packaging dozens to hundreds of leveraged loans and then structuring the pool of loans into securities based on credit risk. The portfolio also includes some cash holdings, which the fund’s management anticipates deploying in the foreseeable future.
The fund’s holdings exhibit a broad sector diversity. Major sectors represented in CLOZ include Technology, Health Care, and Finance among others. This diversified sector allocation reduces the fund’s risk exposure and adds to its appeal as a potential investment.
A Comparative Analysis with Similar ETFs
When compared with similar ETFs, such as the Janus Henderson AAA CLO ETF (JAAA) and the Janus Henderson B-BBB CLO ETF (JBBB), CLOZ stands out due to its focus on BBB and BB-rated CLO tranches. This focus on lower-rated tranches allows the fund to offer a higher yield, albeit with a higher risk profile.
Pros and Cons of Investing in CLOZ
Investing in CLOZ offers several advantages. First and foremost, the fund’s high yield stands out. With a 10% 30-day SEC yield, the fund offers one of the highest yields among its peers. This high yield can be a significant draw for income-focused investors.
Secondly, the fund’s low interest rate risk is another benefit for investors. As the fund primarily invests in floating-rate assets, it is less susceptible to losses due to rising interest rates. This makes the fund a good choice for investors concerned about interest rate hikes.
However, investing in CLOZ does come with its share of risks. The fund’s focus on lower-rated CLO tranches means it carries a higher credit risk compared to funds that invest in higher-rated tranches. In addition, the fund’s holdings are somewhat illiquid, which can pose a challenge during periods of market stress.
To Invest or Not to Invest?
Investing in the Panagram BBB-B CLO ETF can offer attractive yields and a potential hedge against rising interest rates. However, the fund’s higher credit risk and liquidity risk should be carefully considered.
For investors with higher risk tolerance and a focus on income, Panagram Bbb-B Clo ETF can be an attractive option. However, for those with a lower risk tolerance or a preference for liquidity, other investment options might be more suitable.