Panagram Again Focuses on Debt Securities With Second ETF

Panagram Structured Asset Management launched its second ETF yesterday, again focusing on collateralized loan obligations as rising rates offer investors myriad fixed income choices. 

The Panagram AAA CLO ETF (CLOX), the $15 billion asset manager’s second exchange-traded fund this year, is actively managed and focuses on highest-rated CLOs. It follows the January launch of its first ETF, the Panagram BBB-B CLO ETF (CLOZ), which invests in lower-rated debt securities and has grown into a $73.7 million fund. 

CLOs are securities that bundle loans to businesses usually too small to be able to easily access bond markets. Panagram CEO John Kim told etf.com that the total market for the securities tops $1 trillion, and trading last year hit $200 billion. 

“CLOX is something investors could use as a cash or high-investment-grade substitute,” said Kim, who also manages the fund.  

The loans that are the basis for CLOs are secured by the value of the business itself and are at the top of the capital structure, meaning they get paid first if a business defaults. This helps offset some of the risk inherent in investing in smaller companies’ debt. 

Kim noted that over the course of the entire roughly 25-year history of CLOs, AAA tranche CLOs have had a 0% default rate. He added that they are no longer strictly an institutional-only investment: “CLOs have far more liquidity than they had in the past.” 

CLOs vs CDOs 

CLOs are a different beast than CDOs, or collateralized debt obligations, which were at the core of the 2008 financial crisis. Kim pointed out that they have different assets, with CLOs backed by corporate loans and CDOs including mortgages. 

Addressing the broad similarities, he argued that the actively managed structure of a CLO protects it from default risk: “Rather than a closed pool like a CDO where you can’t mitigate defaults, in a CLO, if the pool starts to go bad, you can sell worse-performing assets and replace them with other cheaper or better quality assets.” 

Regarding concerns about credit rating agencies, Kim noted that “ratings agencies will always have inherent conflicts, as they’re being paid by the people they’re rating, but the methodology for CLO bonds has been extremely conservative.” 

CLO bonds rated by S&P have less than a 1% cumulative default rate, he said. 

CLOX has an expense ratio of 0.20% and holds 22 different CLOs rated AAA. 

Contact Gabe Alpert at [email protected]