CLOs: Staying Nimble Amid Tariff Driven Volatility>

In the first quarter, the VanEck CLO ETF (CLOI) outperformed its benchmark, the J.P. Morgan CLO Index, by 11bps (1.18% vs 1.07%), and the VanEck AA-BB CLO ETF (CLOB) outperformed its benchmark, the J.P. Morgan CLOIE Balanced Mezzanine Index by 10bps (1.12% vs 1.02%).

CLO spreads widened through the quarter, and “Liberation Day” has added significant uncertainty to the outlook. Given signs of economic weakening in the US and the prospects of a global trade war, we prefer tranche purchases higher in the capital stack, with selective purchases of shorter spread-duration assets for lower-rated credits. However, wider spreads may begin to offer opportunities for long-term investors, and we maintain the ability to shift further into lower-rated tranches given our overall portfolio positioning higher up the capital stack. A robust bottom-up approach to security selection that looks beyond a tranche credit rating remains key, given the significant tail risks to the fundamental backdrop and increased dispersion in performance among vintages.

Market Update

In March, CLOs generated marginally positive total returns as the impact of carry outweighed negative price returns. This month marked the 24th consecutive month of positive total returns. However, it was the lowest total return since March 2023 as BBB to B-rated tranches generated negative total returns. All tranches posted positive returns for the quarter. Investor sentiment has grown more cautious amid a backdrop of an escalating trade war with the potential risks of an economic slowdown and stubbornly sticky inflation. During the month, all eyes were on April 2, when the Trump administration was expected to unveil the next steps of their tariff regime. Ultimately, the administration announced “reciprocal tariffs” on more than 180 countries and territories to varying degrees, including a 20% tariff on the EU and 34% on China. The narrative coming out of the Federal Reserve following its March meeting was mixed, as it downgraded economic growth to 1.7% from 2.1% and increased core inflation expectations to 2.8% from 2.5%. Despite that, the Fed signaled a somewhat dovish tone, as the dot plot still indicated two rate cuts this year while it is reducing tapering its balance sheet. However, the dot plot showed that four members now see no change in rates, up from just one member in January. The 5-year Treasury rate traded 7 bps lower, and the 10-year Treasury rate was unchanged during the month.

CLOs outperformed bank loans and high yield corporates but underperformed investment grade corporates and the agg as longer duration exposure contributed positively.

Source: JP Morgan and ICE Data Indices as of 3/31/2025. CLOs represented by J.P. Morgan Collateralized Loan Obligation Index, CLOs IG represented by J.P. Morgan Collateralized Loan Obligation IG Index, CLOs Mezz represented by J.P. Morgan Collateralized Loan Obligation Balanced Mezzanine Index, AAA Rated CLOs represented by J.P. Morgan CLO AAA Index, AA Rated CLOs represented by J.P. Morgan CLO AA Index, A Rated CLOs represented by J.P. Morgan CLO A Index, BBB Rated CLOs represented by J.P. Morgan CLO BBB Index, BB Rated CLOs represented by J.P. Morgan CLO BB Index, US Agg is represented by the ICE BofA US Broad Market, Investment Grade Corporates represented by ICE BofA US Corporate Index, High Yield Bonds represented by ICE BofA US High Yield Index and Leveraged Loans represented by JP Morgan Leveraged Loan Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

CLO new issue supply decreased month-over-month with $16.8bn pricing, compared to $18.4bn in February. Refinancing and reset activity slowed but continued at a rapid pace in March with $35.4bn pricing, after $37.7bn in February. First quarter total issuance of $150.2bn is the fastest issuance to start a year on record and the second largest quarterly issuance in CLO 2.0 history behind 4Q 2024.

In the secondary market, TRACE supply increased month-over-month, with $22.7bn of volume in March compared to $13.6bn in February. Investment grade volumes increased to $18.5bn from $10.1bn and below investment grade volumes increased to $4.2bn from $3.5bn. Meanwhile, total BWIC volume increased to $7.7bn from $5.1bn in February and was the highest since March 2020.

In March, gross institutional loan issuance was $35.7bn, following $44.2bn in February. The primary market continued to cool in March amid rising volatility and softening investor sentiment. Opportunistic transactions declined as the number of loans trading at or above par, typical candidates for repricings and refinancings, fell further. One bright spot was LBO and M&A transactions, which totaled $20 billion for the month and contributed to a more balanced technical environment. Retail loan funds saw net outflows of $6.2bn. The average bid of the Morningstar LSTA Leveraged Loan Index decreased 84bp to end the month at 96.31, the largest monthly decline since September 2022. The percentage of loans pricing at par or above decreased to 10.3% from 35.8%; the percentage of loans pricing between 95 and par increased to 73.9% from 51.5%; the percentage of loans pricing below 90 increased to 9.0% from 7.1% and loans pricing below 80 increased to 3.2% from 3.1%.

The trailing twelve-month default rate within the Morningstar US Leveraged Loan Index increased 1bp month-over-month to 0.82%. As measured by JP Morgan, the default rate including distressed exchanges decreased 7bp, but remains elevated at 3.86%. Activity has been elevated as borrowers with unsustainable capital structures endeavored to manage their liabilities and avoid the bankruptcy process through liability management exercises, keeping the “official” default rate lower than otherwise. We anticipate the default rate to remain below historical averages in the near term for the leveraged loan market as a result. Nonetheless, our expectations are that defaults, including distressed exchanges, will remain above the long-term historical average of ~3%, with the path for the default rate uncertain given rapidly changing trade policy and US CLO spreads widened across the capital stack.

Portfolio Strategy

Despite rate cuts in 2024, the borrowing rate for leveraged loan companies remains high following rate increases from central banks in 2022 and 2023. While the Fed initiated a series of rate cuts starting in September 2024, inflation remains above the Fed’s target and the labor market remains robust, although signs of slowing growth are starting to creep up. The Fed has paused further action as they await more information on the path of inflation and employment, which may result from the implementation of tariffs and more robust immigration policies. Market expectations with respect to Fed cuts moved slightly higher in March, with the market now expecting three to four rate cuts in 2025. However, the Fed appears to be in a very tenuous position, having to balance both sides of their dual mandate of maximum employment and stable prices during a period where stagflation is looking ever more likely. Cuts will ultimately provide relief for more stressed borrowers, but the path and timing of more cuts are highly uncertain.

The rally in CLO prices we’ve seen since the lows in 4Q 2022 has cracked, with prices declining across the capital stack in March and throughout the beginning of April. The average price across all tranches is now below par for the first time since January 2024. We have also begun selling out of positions higher in the capital stack to raise cash as wider spreads lower in the capital stack are starting to look more attractive for longer-term investors. If spreads were to widen further, we maintain the ability to shift further into lower rated tranches, given our overall portfolio positioning higher up the capital stack.

As markets have sold off in recent weeks, buying in the secondary market has become much more attractive. That said, buying in the primary market also remains attractive, even when taking spread duration into account. CLO equity arbitrage in 2024 was supported by continued liability spread tightening. While recent volatility has driven CLO debt spreads wider, average loan prices have declined materially from the highs in late January, making CLO creation more attractive. Despite that, high levels of amortization and call volumes resulted in marginally negative net AAA supply for 2024 and flat net supply through 1Q 2025.

CLOI Total Return and Credit Allocation

Source: FactSet, J.P. Morgan, VanEck , as of March 31, 2025. Index performance is not representative of Fund performance. It is not possible to invest directly in an index.

Average Annual Total Returns ^*  (%)

^*  Returns less than one year are not annualized.

The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.

CLOI’s gross expense ratio is 0.40% and the total expense ratio is 0.40%. Van Eck Associates Corporation (the “Adviser”) will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Notwithstanding the foregoing, the Adviser has agreed to pay the offering costs until at least May 1, 2025. “Other Expenses” have been restated to reflect current fees.

CLOB Total Return and Credit Allocation

Source: FactSet, J.P. Morgan, VanEck , as of March 31, 2025. Index performance is not representative of Fund performance. It is not possible to invest directly in an index.

Average Annual Total Returns ^*  (%)

^*  Returns less than one year are not annualized.

The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.

CLOB’s gross expense ratio is 0.45% and the total expense ratio is 0.45%. Van Eck Associates Corporation (the “Adviser”) will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Notwithstanding the foregoing, the Adviser has agreed to pay the offering costs until at least May 1, 2026. “Other Expenses” have been restated to reflect current fees.

Outlook

Clearly the ground has shifted coming out of “Liberation Day,” with the implications and the ultimate impact to the economy still uncertain. Many questions remain related to the impacts on employment and sentiment; if and when the Fed will react and how large of an impact any actions to support the economy will have; and, ultimately, how other countries around the world will react and/or retaliate. Looking ahead, we see continued geopolitical uncertainty and market volatility as tariff negotiations continue over the next few weeks and months.

Through just the first nine days of April, we have seen the Trump administration announce “reciprocal tariffs” on more than 180 countries and territories to varying degrees, including a 20% tariff on the EU and 34% on China, China retaliating with 84% tariffs of its own, followed by the administration “immediately” raising U.S. tariffs on Chinese imports to 145% while simultaneously pausing increased tariff rates above 10% for other countries for 90 days. While the path of trade policy is highly uncertain, what is highly likely is that even a minimum increase of 10% in tariffs will increase inflation and lead to a significant economic slowdown, or more likely, a recession in the United States and the rest of the world. Unemployment will also increase – the only question is when and to what level. In addition, given the increased prospects of a stagflationary environment, we do not expect the Fed to come to the rescue. At present, our view is that given expectations of sticky or higher inflation, the Fed will most likely only start to lower rates when unemployment increases above 5%.

In a world where interest rates will be higher for longer and credit spreads wider, floating rate assets continue to be attractive. We are looking to rotate down from AAA/AA tranches to A/BBB and opportunistically adding some BB-rated tranches where allowed. Historically, BBB-, BB- and B-rated CLOs outperform in the years following significant fixed income underperformance, and we expect them to be among the top performing fixed income asset classes.

That said, we see spreads and yields attractive under most market scenarios over the next twelve months. Notwithstanding the shorter-term tailwinds, we believe wider spreads are beginning to offer attractive entry points for longer term investors. However, a robust bottom-up approach to security selection remains key given the significant tail risks to the fundamental backdrop and a market bifurcated between vintages and, relatedly, between deals in and out of their reinvestment periods. Given the dispersion seen in the loan market, certain CLO portfolios holding weaker credits may eventually experience impairments to the lowest-rated debt tranches. As a result, vintage, portfolio, and manager selection remain key.

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