Investors are pouring cash into a specialized credit ETF that has proven to be a relative safe haven at a time when a rapid rise in interest rates has hurt both stocks and bonds. The Janus Henderson AAA CLO ETF (JAAA) , which buys highly rated collateralized loan obligations, has grown rapidly this year and outperformed many popular bond ETFs. The fund passed $4 billion in assets in the final week of September, just ahead of the third anniversary of its launch, with more than $2 billion of inflows coming in 2023 alone, according to FactSet. The fund has a 30-day SEC yield of 6.66%, putting it above the yield of U.S. Treasuries. And the rates on CLOs, which are bundles of bank loans, are floating. That means the fund has been able to generate a positive return even as yields have climbed, sending other fixed income prices lower. The JAAA has a total return of about 6.4% year to date, compared to a gain of less than 2% for the Vanguard Short-Term Treasury ETF (VGSH) and a loss of more than 12% for the iShares 20+ Year Treasury Bond ETF (TLT) , according to FactSet. JAAA YTD mountain The JAAA ETF has held up this year despite rising interest rates. John Kerschner, head of U.S. securitized products at Janus Henderson, told CNBC that the combination of rising rates and recession fears have made the JAAA fund attractive to investors in 2023. “Most people thought this year was going to have some sort of slowdown, so people wanted the floating rate exposure given what’s happening at the Fed, and they wanted high credit quality,” he said. The downside to floating rate funds is that the strategy will likely underperform traditional high quality bond funds when rates go back down, Kerschner said. JAAA could also see some price decline if an economic downturn causes investment grade bond spreads to widen. Kerschner said that investors could use JAAA as a way to get more yield out of the cash portion of their portfolios. “You don’t want 100% of your money in JAAA, because at some point rates are going to go down. And whether that’s in a month or three months or six months, it’s very hard to say,” he said. The fund is actively managed but is tightly correlated to the JPMorgan AAA CLO Index, Kerschner said. JAAA has a net annual expense ratio of 0.22% and is in the top 10% of ultra short bond funds this year in terms of performance, according to Morningstar . There are other CLO ETFs on the market, including the BlackRock AAA CLO ETF (CLOA) that launched earlier this year, but JAAA is the largest. The fund is still far away from the point where its size relative to the market would be a concern, Kerschner said. Given the size and depth of the AAA CLO market, the fund should have no problems operating until it is about $20 billion in assets, at least, he estimated.
