A new ETF will let investors buy into risky debt some call ‘ground zero’ for the next financial crisis

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  • A UK-based asset manager has filed for an ETF tracking one of the riskiest segments of the financial world.
  • If approved, the Janus Henderson B-BBB CLO ETF will open up access to the collateralized loan obligations.
  • CLOs are pools of risky corporate loans, bundled together and sold to investors as floating rate debt securities.
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A UK-based asset manager has filed for an ETF in one of the riskiest segments of the financial world, bringing a complex but potentially lucrative asset to retail investors, according to a company statement.

If approved, the Janus Henderson B-BBB CLO ETF will open up access to the collateralized loan obligations – a type of security that packages up riskier corporate debt.

Having been burned by CDOs during the financial crisis, many remain wary of CLOs, though others consider CLOs less risky. A UBS analyst told the Financial Times last year that CLOs were “ground zero” for the vulnerability of the US financial system.

What’s more, the new Janus Henderson ETF also deals in lower-rated CLOs – the riskiest parts of an already risky asset class. The asset manager says at least 80% of the fund will be invested in assets rated between BBB+ and B-, the lowest investable asset rating, according to the company’s SEC filing.

Alongside the risks of these low-rated CLOs come rewards. A similar Janus Henderson ETF dealing with top-rated AAA debt has paid back a 2% yield since its inception in October 2020 with a 0.25% expense ratio, according to the company. For comparison, the latest yield on a one-year Treasury bill is 0.09%.

But some analysts are skeptical about whether opening up such investment options to retail investors via an ETF is a good thing.

“I don’t think retail really needs to be getting into CLO BBBs,” John McClain, a bond portfolio manager at Brandywine Global Investment Management, told Bloomberg. “Dipping down in the stack you are picking up pennies in front of a liquidity steamroller if the market shuts down.”