Collateralized loan obligations may become the next big push in the exchange-traded fund industry. VettaFi's Todd Rosenbluth suggests there's investor demand for the alternative assets due to ongoing interest rate uncertainty. "[CLOs have] been popular within the marketplace," the firm's head of research told CNBC's "ETF Edge" this week. CLOs are short-term fixed income strategies that consist of pools of floating-rate secured loans. They're designed to deliver relative stability and attractive yields across market cycles. "We've seen fixed income ETF demand be quite strong," Rosenbluth said. "I think that's going to continue as we're still waiting for some clarity from the next move of the Fed." Last month's Fed's decision to keep rates unchanged is a catalyst for short-term product demand, according to Rosenbluth. The industry appears to be acknowledging investor interest. Rosenbluth listed Reckoner Capital Management, an ETF provider specializing in CLOs, as a firm actively creating new CLO ETFs this year. "That's caught our attention," he said. "It's just great to see the innovation that's happening within the fixed income ETF marketplace." Jennifer Grancio, global head of distribution at TCW Group, is also seeing a preference to fixed income from an asset manager perspective. "I think a lot of advisors are holding a core income-oriented portfolio and then dabbling a little bit with short duration or CLO products," she said. However, Rosenbluth acknowledges risks associated with CLO ETFs. "While AAA-rated CLO tranches boast near-zero default rates, lower-tier tranches (BBB-B) face heightened default risk and market volatility during economic stress," he wrote in a special note to CNBC. "In addition, because corporate loans in CLO pools carry significant exposure to tech and software sectors, private credit jitters or tech selloffs can spill over and trigger spread widening." He added that investors are therefore seeking AAA-rated and senior-secured assets to capture attractive yields without that long-term maturity risk.
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