New active funds split exposure between AAA-rated and lower-rated CLO tranches, marking Fidelity’s first ETFs dedicated to the asset class.
Fidelity Investments is expanding its presence in collateralized loan obligations with two new actively managed ETFs that split exposure between AAA-rated tranches and lower-rated slices of the market, giving advisors another way to source income and diversification from structured credit.
The firm on Thursday launched Fidelity AAA CLO ETF, ticker FAAA, and Fidelity CLO ETF, ticker FCLO, on the Nasdaq.
Marking Fidelity’s debut in the CLO ETF space, both funds aim to generate income by investing in CLOs, which bundle corporate loans into securities divided into tranches with different levels of risk and return.
FAAA will focus on the highest-rated part of the capital stack, normally investing at least 80% of assets in AAA-rated CLOs. FCLO will take more credit risk, with the majority of its portfolio in CLOs rated from BBB+ down to B-. Fidelity is positioning the pair as a way for advisors to fine-tune exposure to CLOs depending on client risk tolerance and income needs.
“Investors are looking for new return and diversification opportunities, and we’re committed to meeting client needs by developing high-quality solutions like the new CLO ETFs,” said Harley Lank, head of high income and alternatives at Fidelity Investments, while pointing to Fidelity’s “longstanding history in the CLO space as both an issuer and investor.”
The launches add to a fast-growing corner of the ETF market. CLO ETFs were niche products when they first appeared around 2020, but assets have since swelled into the tens of billions of dollars as more sponsors entered the space and advisors grew more comfortable with the asset class. Industry participants say the AAA segment has become increasingly crowded, and attention is shifting toward products that reach further down the credit spectrum in search of higher yields.
Earlier this decade, many CLO ETFs focused on top-tier AAA tranches, a natural fit for banks and insurance companies constrained by capital and rating requirements. More recently, managers have rolled out funds targeting investment-grade and below-investment-grade tranches, reflecting the reality that most advisors and retail investors are not bound to the same limits as regulated institutions. That has opened the door for strategies such as FCLO, which takes on more credit risk than AAA-only vehicles in exchange for the potential of higher income and total return.
“I do think that we are going to see more and more of these BBB to B ETFs, because the AAA space is just getting too crowded,” Kirsten Chang, senior industry analyst at VettaFi, previously told InvestmentNews.. “You can only go so far down the spectrum though, because once you get below BB or so, you’re running out of liquidity.”
Fidelity is bringing significant scale and a long track record in fixed income to the segment. The firm now offers 77 ETFs and exchange-traded products with $154 billion in assets under management, including a mix of active equity, fixed income, factor and thematic strategies, as well as digital asset products and sector funds. The new CLO ETFs draw on nearly 50 years of high-yield experience and more than two decades in CLO markets, according to the firm.
The portfolio management bench is a key part of the pitch. FAAA will be co-managed by Dave DeBiase, Rob Galusza and John Mistovich, who collectively have more than six decades of experience at Fidelity. FCLO will be led by portfolio manager Michelle Liu, who has 20 years of structured credit experience, with DeBiase serving as co-manager.
Robin Foley, head of fixed income at Fidelity Investments, said the new funds are meant to offer “straightforward access to an often complex market” for ETF investors.
For now, Fidelity is leaning on price to gain traction. Management fees for both FAAA and FCLO will be waived for the first 12 months. After that, gross expense ratios are set at 0.20% for FAAA and 0.45% for FCLO. The funds are available commission-free on Fidelity’s brokerage platforms, and advisors can access more information on the firm’s ETF site.