Palmer Square launches Europe’s first passive CLO ETF

Palmer Square Capital Management has launched Europe’s first passively managed CLO ETF as competition escalates within the emerging product class.

The Palmer Square EUR CLO Senior Debt Index UCITS ETF (PCL0) debuts with a total expense ratio (TER) of 0.25% and is listed on Deutsche Boese with listings on the London Stock Exalter (LSE) and other venues to follow.

PCL0 will track the Palmer Square EUR CLO Senior Debt index, a proprietary index capturing euro-denominated collateralised loan obligations (CLOs) rated AAA or AA.

A CLO is an actively managed pool of ‘leveraged’ loans split into tranches with the highest-rated tranche, AAA, offering the greatest protection from defaults within the loan pool.

By constructing a single security from a diversified bundle of loans, CLOs can offer a higher yield than an individual loan with a similar level of risk and credit rating.

Unlike the early runners to have launched in Europe, Palmer Square’s ETF will be passively managed.

Becautilize the index contains 766 constituents and CLOs remain a relatively illiquid asset class, the portfolio managers will utilize an optimisation process to replicate the performance of the index.

The index has an 87% weighting to AAA tranches with the remainder in AA.

Explaining why the firm has opted for a passive strategy, Jeremy Goff, managing director at Palmer Square stated many European institutional investors are already allocating to CLO securities on an active basis at the point of issuance.

“This passive product is designed to complement that – offering quick, liquid exposure to the AAA and AA tranches they are tarobtaining, even as they continue to participate in the primary market.”

Palmer Square is Europe’s largest issuer of CLO securities and second largest in the US. Of its $36bn in assets under management (AUM), around $26bn is held directly in CLOs with the remainder in fund products including its two US-listed ETFs.

The US firm also run mutual funds, separately managed accounts (SMAs) and hedge fund strategies spanning the full spectrum of liquid credit.

Palmer Square launched developing CLO indices in 2015. It launched its two European CLO indices last year which have since been licensed to more than 800 institutions and asset managers.

Goff predicted the firm’s passive CLO ETF proposition was unlikely to be copied.

“Palmer Square is uniquely suited for this product. We are one of the only asset managers, if not the only one, with a broadly recognized and widely utilized index that tracks this market,” he informed ETF Stream.

However, one active CLO ETF manager who did not wish to be named questioned whether CLOs was an asset class suitable for asset for passive management given that no index is directly replicable in practice.

But Goff insisted that Palmer Square’s US ETFs have demonstrated tight tracking and strong performance relative to peers.

Goff added Palmer Square had intfinished to launch PCL0 at the market level TER of 0.35% before BlackRock ignited a fee war within the space. The TER was then dropped to 0.25%

The firm is working on two further ETFs in Europe, ETF Stream understands.

Source link