AAA CLO ETF(as of 06/30/24) Performance – USD (%)
Cumulative |
Annualized |
|||||||
Returns |
2Q24 |
YTD |
1 Yr |
3 Yr |
5 Yr |
10 Yr |
Since Inception (10/17/20) |
|
ETF @ NAV |
1.87 |
3.83 |
8.87 |
4.42 |
— |
— |
4.03 |
|
ETF @ Market Price |
1.87 |
3.83 |
8.85 |
4.48 |
— |
— |
4.07 |
|
J.P. Morgan CLO AAA Index |
1.77 |
3.64 |
8.48 |
4.61 |
— |
— |
4.21 |
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. Eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Ordinary brokerage commissions apply and will reduce returns. Returns quoted are past performance and do not guarantee future results; current performance may be lower or higher. Investment returns and principal value will vary; there may be a gain or loss when shares are sold. For the most recent month-end performance call 800.668.0434 or visit Products – US Advisor. Expense Ratios (% as of most recent prospectus): Gross 0.22, Net 0.21 Net expense ratios reflect the expense waiver, if any, contractually agreed to through at least February 28, 2025. This contractual waiver may be terminated or modified only at the discretion of the Board of Trustees.
Returns quoted are past performance and do not guarantee future results; current performance may be lower or higher. Investment returns and principal value will vary; there may be a gain or loss when shares are sold. For the most recent month-end performance call 800.668.0434 or visit Products – US Advisor. |
Investment environment
A couple of sticky inflation prints and continued economic resilience drove yields higher early in the quarter, as investors were forced to reconsider the expected pace of rate cuts forecasted for 2024. In the back half of the quarter, yields retraced some of their earlier losses as inflation returned to its downward trend, and the Fed continued to signal that they would start cutting rates in 2024. While jobs growth remained healthy, other economic data showed signs that the labor market is coming back into better balance and that economic growth is cooling. The yield on the U.S. 2-year Treasury (US2Y) ended the quarter at 4.75% relative to 4.62% at the end of March. Spreads on AAA CLOs ended the quarter 19 basis points (bps) tighter at 125 bps, on the back of the positive outlook and strong demand for CLOs.
Portfolio review
Spread levels narrowed during the quarter as investors continued to embrace risk assets on economic resilience. The Fund’s slightly longer duration contributed as spreads narrowed, while a small allocation to AA rated CLOs also helped relative returns. Security selection within our allocation to AAA rated CLOs further contributed.
CLO spreads have normalized somewhat versus corporates, yet they continue to look attractive on a relative value basis. Additionally, rate cut expectations have moderated significantly since the beginning of the year, with fewer than 2 rate cuts now expected for 2024. In our view, the healthy economy underpins a less-aggressive rate cutting cycle, keeping short-term rates higher for longer, thereby benefiting floating-rate bonds.
We witnessed strong demand for AAA CLOs during the quarter, as more banking institutions, both locally and offshore, entered the market. Supply remains another positive for the CLO market, as we anticipate around $130 billion of net new issue in 2024. We continue to find attractive opportunities in the primary issue market.
We believe AAA CLOs should continue to offer attractive income to investors and recommend investors keep in mind that the certainty, timing, and extent of projected rate cuts remain highly uncertain. Therefore, we like the diversification benefits that floating-rate AAA CLOs bring to fixed income portfolios.
Manager outlook
As we look toward the latter half of 2024, market participants are grappling with questions of when and by how much the Fed will cut rates. The central bank remains committed to its data-dependent stance and, as a result, rates markets continue to fluctuate with each relevant data release. Presently, expectations are for 1-2 rate cuts in 2024.
While economic growth, jobs growth, and corporate earnings have been robust, we are starting to see some softening in the economy and the labor market. We do not believe this is cause for investor concern. Rather, we see the slowing of the economy as the key to bringing inflation back to target, which will ultimately allow the Fed to become less restrictive. Simply put, the economy appears to be slowly slowing, but not stalling.
We still believe we are at the beginning of a Fed rate-cutting cycle, but the start date and cadence thereof remain an open question. We believe high-quality floating-rate exposure remains a key component of a strategy to navigate the economic and monetary environment, and taking advantage of the yield available at the front end of the yield curve through AAA CLOs remains one of the most attractive spots in fixed income. Furthermore, we think spreads on CLOs continue to look cheap relative to corporate bonds. In our view, AAA CLOs remain an attractive addition to portfolios due to their diversification benefits, low interest rate volatility, attractive yield levels, and strong credit ratings.
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