Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week!

Yes, this is the ETF of the Week, where we get the latest take from Todd Rosenbluth on trending, new, newsworthy, unique, and intriguing exchange traded funds. Todd is the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools and research you need to improve your ETF investing skills.

Todd Rosenbluth, it’s great to chat with you again!

Todd Rosenbluth: It’s great to be back, Chuck!

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The BondBloxx Private Credit CLO ETF (PCMM).

Chuck Jaffe: PCMM, the BondBloxx Private Credit CLO ETF. OK, a lot in there, but the basics are private credit, which I don’t know if it’s been one of the hottest asset classes in terms of asset flows. But in terms of how much volume it’s being talked about, private credit has been huge. So why this fund, and why jumping on the private credit bandwagon now? Because, there’s not a lot of ETFs that do private credit.

Todd Rosenbluth: So the BondBloxx ETF is actually the first one to focus on middle market companies. The first private credit ETF launched in December, so it’s going to be roughly three months old. It’s been gathering assets. We’re really excited with how that buildup has been going.

You’re right. Private credit is an area of focus for many investors. We’re starting to hear more and more about it. Why? Because it provides diversification within a broader portfolio. We’ll talk about that, I’m sure, in a moment. It offers an above average yield without taking on too much credit or interest rate risk. And I’m sure we’ll get into the details. But taking on or offering high income without a lot of risk in a novel area is one that caught our eye at VettaFi.

Chuck Jaffe: And it’s going to catch investors’ eyes as well. But let’s talk a little bit about what it is, because it’s private credit, but it’s also CLOs, which are collateralized loan obligations. And that actually might make it more attractive than if it was private credit without the CLO, because collateralized means, there’s something backing up my loan.

Todd Rosenbluth: You’re right. So this ETF invests in the loans. There’s a good number of those loans but they’re pulled together from middle market companies. And so, middle market companies, you got the large ones. You’ve got the small businesses. Middle market companies, there’s roughly 300,000 of them in the United States. And they are a key driver of the U.S. economy and a healthy part of the U.S. economy, and pooled together in this ETF.

It offered its first distribution yield of 8.72%. It’s got an SEC yield of 7.44%. There are different calculations for that. But I mentioned not taking on a whole lot of risk. So it has duration of about a quarter of a year — three months. And it has an average credit rating of single-A. That’s a great combination — that credit and duration risk.

Chuck Jaffe: It sure is. The other thing about it is it’s for almost everyone, not just because it’s the first to be doing the middle market companies, but just because there are so few ETFs. Unless you were looking to get private credit exposure either directly or in some sort of a private fund, or you were doing it maybe in the closed-end fund space, there haven’t been that many opportunities.

So this is almost certainly a diversifier. But as a result of that, where does it fit into a portfolio? If you’re adding this, where’s the money coming from? And how is this supposed to function in a portfolio?

Todd Rosenbluth: I want to just hit on that point you were just making, and then I’ll answer your question of how it fits into the portfolio. If you are an ETF-minded investor or advisor, there haven’t been opportunities to have exposure to private credit. And this ETF from BondBloxx offers that — with the benefit of liquidity, the benefits of ease of use, the tax efficiency, all those things that many investors and advisors love about ETFs. They now have access to that, or access to private credit with those benefits.

To me, this would fall into the bucket of a higher-yielding ETF. Now, the credit risk is not what you’d find within a traditional corporate bond ETF. I mentioned, it’s single-A, as opposed to double-B, but when the yield is that high, you know, we want to make sure that you’re aware of the risk that comes from such exposure.

So this should be part of obviously your fixed income exposure. If you are a risk-tolerant investor, you should find comfort in this, but it should fall into more of the corporate bond or even high yield corporate bond slice of the portfolio as opposed to Treasuries or even just your core aggregate bond exposure that’s mostly exposed to Treasuries.

Chuck Jaffe: I mentioned that private credit has been certainly taking up a lot of the air space, if not a lot of the investable assets, because it has become so popular as an alternative asset class right now. That said, this is the ETF of the Week. And this week on “Money “Life,” I was discussing private credit a little bit with Jeff Rosenkranz, who’s a fixed income manager at Shelton Capital Management. He runs their tactical credit fund.

He was saying that all of the rapid expansion in private credit is going to leave, potentially, private credit more vulnerable for some sort of blow-up, that, as there’s been all this increased demand, the underwriting has gone down, etc. And we’ve seen blow-ups in private equities and some other things. We haven’t seen one yet in private credit.

How much do you worry that something like that could happen, that even as you’re talking about A-rated private credits, that the folks who are doing the rating, it’s still a fairly new science on private credit?

Todd Rosenbluth: Right. So, what gives me some comfort is that this holds a collection of CLOs. The CLOs own roughly 80 to 100 different loans themselves. It’s run by some of the well-known managers within that space, like Ares or KKR. And so you get the benefits of that. But yes, any investment is going to come with risk. Anything that is a relatively newer space is going to get more scrutiny from investors, and from experts within the field.

If this is part of a slice of your broadly diversified portfolio, then I have more comfort than if this is your fixed income allocation.

Chuck Jaffe: Do we need to wait for funds like this to be a little more seasoned and to prove themselves? It’s reached past $25 million in assets, which is like the minimum for a lot of folks in terms of a fund company gets serious once you get somewhere past $25 or $50 million.

So you’re not worried that this fund is going to go away. At the same time, do you want to see it prove itself, or it’s not necessary?

Todd Rosenbluth: So I don’t know if it’s necessary. The firm behind this, BondBloxx, is an expert within the fixed income ETF space. It’s their area of focus. They’ve been increasingly talking about this strategy and have confidence in this, which makes me feel comfortable that this ETF has legs and the investor base has been building. I think when I last looked, it was $60 million in assets under management.

That’s a nice start for a new entrant, the first-of-its-kind ETF. Investors that are listening need to make sure that this can fit into their portfolio and how it can fit into their portfolio. So if they’re looking for a little bit of extra income without taking on that much interest rate or credit risk, I think that the BondBloxx ETF is a good way of getting such exposure.

There are lots of ETFs to consider, but this is the one we’re focusing on this week.

Chuck Jaffe: It’s the PCMM. The BondBloxx Private Credit CLO ETF, the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. Talk to you again next week!

Todd Rosenbluth: Thanks a lot, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and “Money Life” with Chuck Jaffe. And I am Chuck Jaffe, and I’d love it if you check out my hour-long weekday show by going to MoneyLifeShow.com, or by searching for it wherever you find your favorite podcasts.

Now, if you’re searching for information on your favorite ETFs or your next favorite ETFs, make sure you check out VettaFi.com, where they’ve got all the tools you need to make yourself savvier, smarter, and more confident.

They’re on X at @Vetta_Fi, and Todd Rosenbluth, their head of research, my guest, he’s on X too at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast app. And we’ll be back with another cool ETF to discuss next week. Until then, happy investing everybody!

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