ETF 360: Reckoner's John Kim on CLOs

Reckoner Capital Management's John Kim highlighted Collateralized Loan Obligations (CLOs) as an alternative credit asset class historically offering wider spreads and better default performance than corporate bonds, traditionally more accessible to institutional investors. His firm's Reckoner Leveraged AAA CLO ETF (RAAA) differentiates itself by applying a modest one turn of leverage to AAA CLOs, a technique common in institutional markets, to enhance yield for wealth managers and individual investors, with a strategy to dynamically adjust leverage based on market conditions.

Analysis

Reckoner Capital Management is introducing a new exchange-traded fund, the Reckoner Leveraged AAA CLO ETF (RAAA), aimed at bringing an institutional-style credit strategy to a broader investor base. The fund's manager, John Kim, highlights that Collateralized Loan Obligations (CLOs) have historically provided wider spreads and superior default and loss performance compared to standard corporate bonds. The key differentiator for RAAA in what is becoming a crowded AAA CLO ETF market is its use of modest, dynamic leverage. The fund applies a 'one turn' of leverage with the explicit goal of enhancing yield, a common technique in institutional markets. This leverage is not static; the strategy involves increasing it during benign market conditions to maximize income and reducing it during 'rocky' periods to mitigate risk. The firm positions itself as a specialist in alternative credit, with team members possessing deep experience across various aspects of the CLO market, underpinning the credibility of this specialized product launch.

Key Decisions for Investors

• Investors seeking higher income from credit assets should evaluate RAAA's leveraged strategy, which aims to enhance yield on a portfolio of AAA CLOs.
• The fund's performance will be highly dependent on the manager's ability to dynamically adjust leverage in response to market conditions, a key factor for due diligence and ongoing monitoring.
• Given the increasing number of AAA CLO ETFs, it is prudent to compare RAAA's fee structure and risk profile against unleveraged alternatives to ascertain if the potential for higher yield justifies the added complexity of its leveraged approach.