In a year dominated by the active ETF story, it seems fitting to award my favourite launch to Europe’s first collateral loan obligation (CLO) ETF.
The Fair Oaks AAA CLO UCITS ETF (FAAA) – which won Innovative ETF Of The Year at the ETF Stream's Awards 2024 – is an ETF share class of an existing Luxembourg-domiciled Fair Oaks mutual fund capturing euro denominated AAA-rated CLOs.
Fair Oaks gained first mover advantage over Janus Henderson in the CLO space amid increased speculation the US giant would be the first to launch since its takeover of Tabula Investment Management in July.
As the market presented sustained levels of volatility this year, FAAA is an option for investors seeking to access high credit quality, short duration and relatively high yields in their fixed income allocations.
In fact, there have been zero defaults in European AAA CLOs since data began being calculated in 1997.
This, alongside comparably more attractive spreads and yields offered by these floating-rate debt instruments makes FAAA a particularly eye-catching launch this year.
The launch of FAAA also revealed a stream of interesting regulatory insights and developments.
For example, Fair Oaks was able to add an ETF share class to an existing UCITS sub-fund as both are domiciled in Luxembourg.
Luxembourg’s financial regulator states the naming convention only concerns the ‘level’ at which the ‘UCITS ETF’ identifier must be used.
Though Ireland’s rules were once more stringent, the Central Bank or Ireland (CBI) has since relaxed its share class naming stance.
Other regulatory insights included FAAA adhering to the continent’s regulation which requires companies issuing CLOs to retain a stake in these products, ensuring they share some of the risk alongside investors.
Following Fair Oaks’ lead, Janus Henderson applied to launch a UCITS version of its flagship CLO ETF following speculation the firm was set to enter the space.
In addition, there is growing interest from managers in the industry to launch their own CLO ETFs.
In Maples Group’s bi-annual European CLO report, the firm said it is “in conversation with several CLO managers now actively exploring how to replicate similar strategies to broaden their CLO product range.”
FAAA remains well placed Europe’s burgeoning active ETF market. Janus Henderson recently suggested active ETFs could hit $1trn in Europe by 2030.
They also accounted for 7.7% of inflows in Europeans ETFs over Q3, according to data from Morningstar.
