Advisors already know that fixed income is driving exchange traded funds (ETFs) growth and that’s true of both active and passive products. It’s a trend that’s likely to continue because many of the best equity ideas in the ETF wrapper are already spoken for.
Digging deeper into fixed income ETF growth, it’s sourced from a variety of segments, including the emergence of Collateralized Loan Obligation (CLO) ETFs. There’s a steadily rising number of CLO ETF options for advisors to consider, which makes sense because unbeknownst to many clients, this corner of the bond market is worth over $1 trillion.
Important to advisors is the fact that many of the largest CLO ETFs are issued by recognizable, trusted brands and the same is true of new funds addressing this asset class. On Thursday, Feb. 12, Fidelity entered the CLO ETF space with two funds – the Fidelity AAA CLO ETF (FAAA) and Fidelity CLO ETF (FCLO), both of which are actively managed.
Let’s get into the details on these rookie CLO ETFs.
CLOs are attractive and unique because they feature above-average levels of income with sturdy credit quality – a combination that’s often difficult to find in the bond market. Additionally, this is an asset class that is conducive to considering actively managed funds or ETFs because CLOs themselves are actively managed – a potential selling point for skittish clients.
“FAAA and FCLO both seek to generate income by investing in CLOs. FAAA normally invests at least 80% of its assets in CLOs that are rated AAA, while FCLO invests the majority of its assets in CLOs rated from BBB+ to B- or the equivalent,” according to a statement issued by Fidelity.
On the basis of the aforementioned credit ratings spectrums, FCLO will in all likelihood sport consistently higher yields than FAAA because the former holds lower-rated CLOS.
“Investors are looking for new return and diversification opportunities, and we’re committed to meeting client needs by developing high-quality solutions like the new CLO ETFs,” said Harley Lank, head of High Income & Alternatives at Fidelity Investments, in the press release. “Fidelity has deep credit research capabilities and a longstanding history in the CLO space as both an issuer and investor.”
Good News for Penny-Pinchers
For cost-conscious advisors investors, there are added bonuses associated with the new Fidelity ETFs. Advisors that custody with Fidelity can transact in the new CLO funds on a commission-free basis.
Additionally, Fidelity is waiving the annual expense ratios on both funds for the first year. After that, FAAA will charge 0.20%, or $20 on a $10,000 investment, while its higher yield counterpart will charge 0.45%.
With the debuts of FAAA and FCLO, Fidelity’s ETF lineup consists of 77 products.
Related: Why Financial Stability Is the New Romance (And What Daters Are Watching Closely)