First Leveraged CLO ETF Tests Retail Crowd’s Appetite for Risk

Reckoner Capital Management is testing investors’ hunger for a new category of risky bets with an exchange-traded fund that uses leverage to juice returns on collateralized loan obligations.

The Reckoner Leveraged AAA CLO ETF (ticker: RAAA) is the first such fund to invest in a variety of top-rated CLO bonds while leveraging up to 50% of that exposure, according to a statement.

The ETF arrives amid strong demand for collateralized loan obligations, which bundle buyout debt into bonds. Retail investors are also embracing leveraged investment strategies, once considered the province of investment professionals, like hedge funds and asset managers, that can move in and out of wagers quickly.

The danger of leveraged ETFs is that while borrowed money can amplify returns, it magnifies losses too.

“We think of this as a natural evolution in the CLO market,” said John E Kim, co-founder and CEO of Reckoner. “There’s relatively little risk of default in CLOs and banks are quite willing to provide financing against them.”

As market volatility rises and falls Reckoner’s portfolio managers will actively adjust the fund’s overall leverage, which will come mainly in the form of reverse repurchase agreements from banks, Kim said. The ability to use leverage will help RAAA opportunistically buy CLO bonds when it believes they’re cheap, rather than first have to sell some of its existing holdings to free up cash, according to Kim.