Inflation and rising rates have affected a variety of investment goals and approaches, particularly for investors focused on retirement.
Key Takeaways:
- Retirement-focused investors are often seeking income, which CLOs can provide.
- Senior CLO tranches can offer strong income, coupons that adjust based on interest rates, and a lower risk of default.
- Fidelity provides actively managed access to AAA-rated CLOs through the Fidelity AAA CLO ETF (FAAA).
Broadly speaking, investors eyeing retirement often have many goals in mind, particularly income. And when inflation, geopolitical uncertainty, and rising interest rates are all playing out at the same time, achieving this can often present a challenge.
Fortunately, there are investment strategies available that can help accomplish this objective. For instance, take a look at collateralized loan obligations (CLOs).
CLOs are securities that bundle lower-rated corporate loans, selling them to investors in tranches. Investors then pick their chosen risk-reward profile based on which CLO tranche they wish to engage with.
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Senior CLO tranches — the tranches typically rated AAA and AA — are the ones that can be particularly well-suited for meeting retirement goals. To start, these strategies can offer strong yield potential, which can serve as a crucial cushion for retirees and potential retirees alike.
The yield opportunities within CLOs come from a few different avenues. Not only can CLO strategies take advantage of the complexity premium, but these securities tend to pay floating-rate coupons. With interest rates expected to stay elevated for a while, CLOs may be well-positioned to benefit.
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Furthermore, AAA-focused CLOs have a strong track record against navigating defaults and write-downs.
FAAA: Actively Managed CLO Exposure
Those looking to take advantage of what CLOs bring to the table may want to consider the Fidelity AAA CLO ETF (FAAA). FAAA offers actively managed exposure to AAA-rated CLOs, leveraging the extensive investing experience and insights that Fidelity offers.
This may make the fund a particularly compelling choice for investors with retirement in mind. FAAA’s approach allows investors to harness the advantages of high-rated CLOs to bring income to their portfolios. Given that FAAA can further amplify this benefit through flexible active management, this may be a fund worth keeping an eye on.
Originally posted on ETF Trends
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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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