Institutional More Appropriate for CLO ETF: Kerschner

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00:00It's an interesting thing that's happening here, and not that surprising.

00:05Interestingly enough, you can already get leverage on JAAA if you're an institutional investor.

00:12There are things like total rate of return swaps, which is you pay a fee and then you get the return of JAAA

00:19without having to put up all the cash you would normally have to to buy JAAA.

00:24But this is a retail-type product, right?

00:27And so when we launched JAAA, we wanted to make it very simple, very safe for people,

00:33because you need to make sure the investors have that education behind the product.

00:38So our concern would be someone buying this, not necessarily understanding how the leverage works,

00:44and then when there is a dislocation like we saw last April,

00:48maybe the drawdown is higher than they would expect from a AAA CLO ETF.

00:52Well, you hit on something that I've been wondering about.

00:54You know, CLOs, they're difficult enough to wrap your mind around.

00:58When you combine that with leverage and you put that in a retail-oriented product,

01:03I mean, are the complexities going to be understood?

01:07Well, that's the $1,000 question, right?

01:10And so it's why we haven't launched this type of product,

01:13because we just worry about investors buying something like this,

01:19and then, you know, when we get another dislocation,

01:23that the drawdown is more than they wanted.

01:26So, look, the CLO ETF market, I think there's close to 30 different products out there.

01:32You know, Europe, USEDS, Canada, there's an incredible diversification around them,

01:38and so this is just the next step.

01:39But as far as we're concerned at Janice Henderson, for our clients,

01:43you want institutional investors who want higher returns or more leverage,

01:49that's more appropriate than a retail investor for this product.

01:52Understood.

01:53And I do want to talk a little bit about the case for investing in CLOs at this juncture.

01:58Of course, CLOs are floating rate securities.

02:00They theoretically benefit when you're in a rising rate environment.

02:03We're not necessarily in a rate-cutting environment,

02:07but there's lots of folks saying that that could be upon us sooner rather than later.

02:12So with that in mind, what is the bull case for CLOs?

02:15Well, I think the bull case is simply that if you look over the last couple of years,

02:20CLOs have done a lot better than cash, right?

02:23And we expect that to continue.

02:25If you look over the last year, it's outperformed cash by 1.4 percent annualized.

02:32If you look over the last three years, it's even a little bit higher than that.

02:35So we actually believe, you know, we had some news here about tariffs,

02:40that there will be some more noise around tariffs.

02:42I don't think that's going away.

02:44I do think you're going to see some increases in inflation over the next couple of months.

02:49I also think the Fed's going to be on hold for quite some time.

02:52I actually believe they will even be on hold in September.

02:56So this kind of bull case where it's a good carry, it's still safety.

03:02And, you know, quite frankly, maybe, you know, it's not likely,

03:06but a possibility if tariffs continue to go up and inflation comes in higher,

03:10the Fed doesn't cut or maybe they have to even increase rates.

03:14So it gives you that hedge for that very low probability but tail situation.

03:18So it's not going to be on hold.

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