As investors look to take advantage of attractive returns in fixed income, one area of the market is often overlooked – securitization products. This field includes several different types of products, each generally created from pools of assets. They include mortgage-backed securities, collateralized loan obligations, commercial mortgage-backed securities, and asset-backed securities. For example, high-quality collateralized loan obligations can yield returns in excess of 6%. Nick Travaglino, lead portfolio manager for the firm's multi-sector fixed income strategy and head of its securitized products team, said investors are often not allocated to “real opportunities” across the sector. Nuveen has $75 billion in securitization assets under management. He added that investors often focus only on mortgage-backed securities, which are high quality and part of the core fixed income market. “It's not the best opportunity available across the securitized landscape,” Travaglino said. “You're missing out on CMBS, you're missing out on ABS and opportunities in mortgage credit.” He noted that there may also be what he calls a misunderstanding about the complexity of the assets. The 51% allocation to securitized credit in Nuveen's Strategic Income Fund produced 64% of the fund's returns in the first quarter, the company said. Overall, securitized products currently look relatively cheap, said John Kirshner, head of US securitized products and portfolio manager at Janus Henderson Investors. “If you look at historical spreads, securitized spreads today are wide… versus corporate credit, which is tight almost all the time,” he said. “You add that to the fact that the yield curve is inverted. So you get a higher return by investing at the shorter end — and most securitized products are issued at the shorter end of the yield curve.” To meet this need, Janus launched the Guaranteed Income ETF (JSI) in November, which invests in securitization. The 30-day SEC yield is 6.71% and the net expense ratio is 0.50%, per Morningstar. JSI YTD Janus Henderson Securitized Income ETF Collateralized Loan Obligations Another fund that Kerschner manages is the Janus Henderson AAA CLO ETF. It focuses on high-quality collateralized loan obligations, which are securitized pools of loans at variable interest rates for companies. The ETF has grown by more than $3.6 billion so far this year to total assets of about $9.48 billion, according to the company. The stock has a 30-day yield of 6.72% and a net expense ratio of 0.21%. Bank of America, which recently began covering CLO ETFs, named JAAA its top-rated CLO fund. Kirshner believes AAA CLOs have a role to play since they are variable interest rate loans and interest rates are expected to remain high for a period of time. It could also be some protection against rising interest rates, he said. “You can get something that gives you security with a high return and no interest rate risk, and that will be right for the vast majority of people out there,” he said. Meanwhile, Rick Reeder, BlackRock's global fixed income chief investment officer, is also bullish on collateralized loan obligations, partly due to the fact that their spreads are still very wide. He also said yields are attractive at around 6.3% or 6.5%. “Think about being able to compound a return of 6.5%, to round numbers, on triple assets,” he said. “I've been doing this for over 30 years. It doesn't happen.” Ryder said he recently added exposure to high-quality collateralized loan obligations in his BlackRock Elastic Income ETF. The fund, which has a 30-day stock yield of 5.96% and a net expense ratio of 0.40%, owned about 11.42% in CLO securities, as of May 16. The company also owns the BlackRock AAA CLO ETF, which has a 6.76% 30-day SEC yield and an expense ratio of 0.20%. Commercial mortgage-backed securities Another part of the market is CMBS, which has gained notoriety due to the office vacancies that have plagued the sector since Covid. Office loan delinquencies rose to 6.4% in April, the highest level since June 2018, according to a recent report from Moody's. Ryder will stay away from offices, but he said there are other areas within CMBS that are very attractive. “The beauty of commercial real estate or commercial mortgages today is that there are a lot of potential buyers and lenders that don't exist, meaning a lot of banks,” he said. Additionally, “because the office market is so fragmented, it has presented a real opportunity in multifamily, logistics, warehousing, and hospitality.” One way investors can gain broad exposure to CMBS is with BlackRock's iShares CMBS ETF. CMBS YTD Mountain iShares CMBS ETF Year-to-Date However, Janus' Kirchner noted that not all paperwork will go away. “The main risks were very high,” he added. “That creates a lot of opportunity in this market for very good buildings, where the sponsor is committed to the building, and is putting a lot of capital expenditures…into the building.” Within CMBS, he also likes hospitality as Americans continue to travel, and data centers, which will receive a boost from artificial intelligence. Nuveen's Travaglino is simply too selective when it comes to CMBS, including desks. “Overall, the CMBS market in 2024 has regained much of the spread breadth or underperformance achieved over the past two or three years, but it still has a way to go,” he said. “There's still an opportunity there.” For example, he added, loans taken out in 2014 or 2015 on high-quality buildings were purchased at a lower price than in 2020 and even 2024. He said those holders have the ability to negotiate to extend the current terms when the loans come due. . “It's a one-size-fits-all scenario. We think there's value in the market mispricing that,” he said. The other thing he focuses on is single-origin, single-borrower loans, as opposed to deals that might involve a number of buildings in different areas of the country. It could be a particular building in a fast-growing area that has had high occupancy for 10 years, he said. It could also have really good credit characteristics, which he and his team can enhance through more local economic research to identify really attractive opportunities, he said. Mortgage Credit Travaglino also likes credit risk transfer securities from Fannie Mae and Freddie Mac, which originate high-quality loans. “When they then issue lower investment grade to lower investment grade issues — from a triple B to a single B note — structurally further away from that high credit quality borrower, I think that's a really attractive combination,” he said. Mortgage credit spreads have narrowed, but Kirchner believes they still have a way to go. “People don't want to sell their homes. They don't want to give up those 3% or 3.5% mortgages,” he said. “We are not building enough shelter in this country, especially at the single-family level.” Correction: The Janus Henderson AAA CLO ETF has a 30-day SEC yield of 6.72%. An earlier version of the table misstated the number.
Trending
- Tesla's Optimus Faces Human Competition at Robotics Conference in Beijing
- How to Position Yourself for a Global Tech Slowdown, According to Morgan Stanley
- Two big tests are coming that will determine whether last week's stock market excitement was justified.
- How a 'seriously outstanding tax debt' can lead to your passport being revoked
- Hezbollah fires rockets at Israel in revenge for its supreme leader
- Boeing Starliner Returns Empty, NASA Enlists SpaceX to Transport Astronauts
- Dividend Stocks Are a Hot Pick in the Fall Due to the Fed and Interest Rates
- Biden speaks with Zelensky, announces new military aid to Ukraine
Why are some investors bullish on this asset class yielding more than 6%?
