Anyone with experience in CLOA?

[Craft111]

CLOA is an active ETF comprised of a AAA strip of collateralized leveraged loans (senior position of this strip results in the AAA). ETF has not been in existence very long. Monthly dividend distribution about 6.6% annualized.

I have a 60/40 portfolio: 60% all in ITOT, 40% in short-duration treasuries barbelled with 7-10 year investment grade corporates (with varying call provisions, so duration may be shorter). All individual bonds that I intend to hold to maturity. I am considering ~10% of my fixed income allocation into CLOA.

Appreciate thoughts/insights.

[beyou]

While BlackRock knows what they are doing, realize CLO securities are highly illiquid, something they admit in the fund prospectus. This means in times of market stress, this fund could have trouble liquidating if investors want to get out of it.
While it is "short duration" and little interest rate risk, there is significant liquidity risk, and possibly credit risk. The securities are "AAA" rated often, but recall that during the GFC, many AAA rated pool loan securities ended up with huge losses. The rating agencies are motivated to give AAA ratings to issuers sometimes when not warranted. By the time they downgrade, if ever, it will be difficult to get $ out of this fund.

As long as you consider this a long term investment and a risky part of your portfolio, go for it.
But this is NOT to be thought of as your bond allocation to add stability to your portfolio.
Do not own in a taxable account as an emergency fund or a fund you would use to pay the bills.
If anything could be in an IRA you don't plan to spend for a very long time.
I think it amazing you can today get a manager to give you access to complex securities with good yields at only 20 bps fees, but you must think about how this fits into a portfolio. Many say take risk on equities not on your bonds, these do not fit that thougth process IMO.

[Valuethinker]

While BlackRock knows what they are doing, realize CLO securities are highly illiquid, something they admit in the fund prospectus. This means in times of market stress, this fund could have trouble liquidating if investors want to get out of it.
While it is "short duration" and little interest rate risk, there is significant liquidity risk, and possibly credit risk. The securities are "AAA" rated often, but recall that during the GFC, many AAA rates pool loan securities ended up with huge losses. The rating agencies are motivated to give AAA ratings to issuers sometimes when not warranted. By the time they downgrade, if ever, it will be difficult to get $ out of this fund.

As long as you consider this a long term investment and a risky part of your portfolio, go for it.
But this is NOT to be though of as your bond allocation to add stability to your portfolio.
Do not own in a taxable account as an emergency fund or a fund you would use to pay the bills.
If anything could be in an IRA you don't plan to spend for a very long time.
I think it amazing you can today get a manager to give you access to complex securities with good yields at only 20 bps fees, but you must think about how this fits into a portfolio. Many say take risk on equities not on your bonds, these do not fit that thougth process IMO.

Excellent analysis.

There's a thing in a crisis/ emergency called, I think, "rational panic".

If you think your bank is going to go bust, it is rational to rush to take your savings out, even though that accelerates the bank run.

If you are in a crowded theatre or airplane and there is a fire, it's possible everyone could get out in an orderly evacuation. But knowing that people will panic, it's rational to shove your way out - thus causing the crush.

Studies of crushes in crowds show that individuals are behaving rationally. It's just when we all do the same thing, the aggregate behaviour is highly dangerous and even fatal.

Thus "liquidity risk". If the fund makes an error and takes losses, as the Primary Reserve Money Market fund did - the oldest MMF, and it lost $450m on Lehman securities, so it "broke the buck". It was rational to get out before others, who would be left with a portfolio of illiquid and unsaleable lower quality assets. Downward spiral. So the fund was frozen and it took years for investors to get their money back fully (I don't think it actually lost anyone money?).

That's why open-ended funds investing in illiquid underlying securities are so deadly. The construction of an ETF is supposed to prevent that, and I don't know enough to know if that would always be true. I think if ETF arbitrageurs refuse to participate (buying and selling units that deviate from the NAV) then it might not be true.

[Weathering]

How would this fund behave if the yield curve un-inverts (I.e., goes back to a normal sloping yield curve)?
Would the yield on CLOA match that of a short-term corporate bond fund and be far lower than a typical intermediate term junk bond fund? I view junk bond funds as CLOA’s competition for investment dollars.

[nisiprius]

...I have a 60/40 portfolio: 60% all in ITOT, 40% in short-duration treasuries barbelled with 7-10 year investment grade corporates (with varying call provisions, so duration may be shorter). All individual bonds that I intend to hold to maturity. I am considering ~10% of my fixed income allocation into CLOA.

Appreciate thoughts/insights.

To approximate your current fixed income I'll assume equal amounts of Vanguard Short-Term Treasury fund (VFISX) and Vanguard Total Corporate Bond ETF (VCIT).

You then have 60% ITOT, 20% VFISX, 20% VCIT.

You are proposing to put 10% of your fixed income... that is to say 4% of your portfolio... into CLOA.

So that would be 60% ITOT, 18% VFISX, 18% VCIT, 4% CLOA.

Over the lifetime of CLOA, this would have been the difference in performance between your original portfolio (blue), and your proposed new portfolio, with 10% of the fixed income in CLOA (red).

Source

[Craft111]

+17 bps CAGR, yes!!.

Just kidding - thank you for that analysis