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This Asset Class Yields Over 6%, Which is Why Some Investors Are Bullish About It

May 19, 2024
minute read

As investors seek to capitalize on attractive yields in the fixed income market, one often overlooked sector is securitized products. This category includes various types of products generally created from pools of assets, such as mortgage-backed securities (MBS), collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), and asset-backed securities (ABS). For instance, high-quality CLOs can offer yields exceeding 6%.

Nick Travaglino of Nuveen, who manages the firm’s multi-sector fixed income strategy and heads its securitized products team, pointed out that investors are frequently under-allocated to the true opportunities within this sector. Nuveen, managing $75 billion in securitized assets, observes that many investors focus primarily on agency MBS, which are high quality and integral to the core fixed-income market. However, this narrow focus means they miss out on potentially lucrative segments like CMBS, ABS, and mortgage credit opportunities.

A common misconception is that these assets are overly complex, which may deter investors. Yet, the performance of Nuveen’s Strategic Income Fund suggests otherwise: a 51% allocation to securitized credit generated 64% of the fund’s return in the first quarter.

John Kerschner from Janus Henderson Investors highlights that securitized products are currently relatively inexpensive. Historical data shows that spreads on securitized products are wide compared to corporate credit, which is nearly at its tightest levels ever. With the yield curve inverted, investors can secure higher yields at the shorter end, where most securitized products are issued.

To cater to this market need, Janus launched the Securitized Income ETF (JSI) in November, which invests across the securitized product spectrum. This ETF boasts a 30-day SEC yield of 6.71% and a net expense ratio of 0.50%, according to Morningstar.

Another fund managed by Kerschner is the Janus Henderson AAA CLO ETF, focusing on high-quality CLOs, which are pools of floating-rate loans to businesses. This ETF has seen significant growth, increasing by over $3.6 billion this year to reach approximately $9.48 billion in assets. It offers a 30-day SEC yield of 6.72% and a net expense ratio of 0.21%. Bank of America has rated JAAA as its top CLO fund, noting the potential benefits of these floating-rate loans in a high-interest-rate environment.

Rick Rieder, BlackRock’s chief investment officer of global fixed income, is also optimistic about CLOs. He points out that the spreads are still wide and the yields are attractive, around 6.3% to 6.5%. Rieder has recently increased exposure to high-quality CLOs in his BlackRock Flexible Income ETF, which has a 30-day SEC yield of 5.96% and a net expense ratio of 0.40%. The fund holds approximately 11.42% in CLO securities as of mid-May. Additionally, BlackRock offers the BlackRock AAA CLO ETF, with a 6.76% 30-day SEC yield and an expense ratio of 0.20%.

Turning to CMBS, the sector has been marred by office vacancies post-COVID, leading to increased office loan delinquencies. Despite the 6.4% rise in delinquencies to the highest level since June 2018, Rieder remains selective, avoiding office spaces but finding opportunities in multifamily, logistics, warehouse, and hospitality sectors. The fractured office market has created buying opportunities in these areas, as many traditional lenders and buyers are currently absent.

Investors can gain broad exposure to CMBS through BlackRock’s iShares CMBS ETF, which provides a diversified entry point into the sector, allowing them to capitalize on the strengths of various commercial real estate segments without the concentrated risk of office space investments.

Overall, while the complexity of securitized products may seem daunting, the potential returns from strategic investments in these areas suggest they are worth a closer look for investors aiming to diversify their fixed income portfolios.

John Liu
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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