Fidelity joins roster of firms offering collateralized loan obligation ETFs

By Suzanne McGee

PROVIDENCE, Rhode Island, Feb 12 (Reuters) - Fidelity Investments is rolling out two actively managed exchange-traded funds on Thursday offering investors access to collateralized loan obligations (CLOs), joining a growing roster of asset managers seeking to tap into demand for private credit investments.

Existing ETFs in the sector have attracted tens of billions of dollars of investor assets since Janus Henderson launched its first product, the Janus Henderson AAA CLO ETF (JAAA) JAAA.P in late 2020. That fund alone now has $26.85 billion in assets, while BlackRock's iShares AAA CLO Active ETF CLOA.O, launched three years ago, has $1.5 billion.

"We've been issuing CLOs for more than two decades now, and that gives us insights into what kind of CLO offers good structural protections and has the appropriate kind of credit risk exposure," Harley Lank, head of Fidelity's high income and alternatives division, told Reuters.

Fidelity is launching one fund, the AAA CLO ETF FAAA.O, that will invest at least 80% of its assets in loan products carrying a AAA rating, the highest possible. The other new offering, Fidelity CLO ETF FCLO.O, will invest in CLOs with a rating of BBB down to B-.

"Given the amount of refinancing that's going to happen to support the AI boom and just the generalized capital spending we're seeing everywhere, it won't surprise me to see net issuance of CLOs and other forms of corporate debt climb," said Dave Nadig, president and director of research at ETF.com, an analysis firm. That is leading firms like Fidelity to enter the market, he added.

On Wednesday, Reckoner Capital, an alternative asset manager, launched four new CLO ETFs, bringing its own roster of products to six.

Arriving later to the party than large rivals like BlackRock and Janus Henderson or more niche providers like Reckoner is not the same kind of handicap in the rapidly growing CLO market that it might be in other corners of the ETF ecosphere, said Bryan Armour, ETF markets strategist.

"While JAAA has a nearly insurmountable head start, this isn't a first-mover-only category," he said, pointing to the 2023 launch of the PGIM AAA CLO ETF PAAA.P, a fund that already has pulled in some $7.5 billion.

As of Tuesday, investors had steered a net $3 billion into all CLO ETFs so far this year, Armour said, while the products have attracted $13 billion in the last 12 months, signaling that investor appetite seems only to be growing.