The European CLO market is once again trailing its bigger US cousin — this time by $9.5bn. US CLO ETFs have reached this volume — a critical mass that means they have begun to anchor deals in the primary market, with no signs of their growth slowing down.
Meanwhile in Europe, the finest legal minds are coming up with complicated structures to generate CLO ETF-like edifices — one puts a fund into an exchange-traded product normally used to punt gold or crypto — because regulators appear to be blocking the easy route, presumably out of concern for retail investors.
Ignoring for a moment that ETFs could also offer small institutional investors access to CLOs, we have to ask: what are regulators worrying about?
Triple-A rated CLOs are among the safest assets out there. Not a single tranche has ever defaulted but over the last two years, they have yielded similar returns to the S&P 500, according to Bank of America.
The same regulators are happy for retail investors to swing it about at the bottom of the capital stack in equities in any number of dodgy companies, and who doesn't have a cousin's mate's dog walker who says they have mastered crypto trading after handing over their life savings to a stranger on Instagram.
Yes, CLOs are a complicated asset. But no one is asking your kindly uncle Bert to perform credit analysis on the underlying loan portfolios. CLO ETFs are actively and professionally managed. Their investors have to understand the principle risks, and trust the manager from there. That is the whole point of any fund.
The better thing to do is let CLO ETFs bloom. Let their managers educate those looking to get rich quick on the latest biotech gamble, or comically named token. In fact, why not insist they take a short course in the basics before they sign over their money? If the EU really believes, as it claims to, that securitization can play a part in financing the real economy, then it won't hurt to show its populations how.