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July 17, 2024
Cadwalader partner Michael Newell spoke with Pitchbook Leveraged Commentary & Data (LCD) News about the popularity of collateralized loan obligation CLO) exchange-traded funds (ETFs) in the United States, and how the trend will likely expand across the Atlantic, published today.
Currently, ETFs are typically structured in Europe with the EU’s Undertaking for Collective Investment in Transferable Securities (UCITS) regulatory (or retail fund) wrapper, and the European CLO market is considerably smaller than that of the United States – two challenges to the expansion that those polled in the 9Fin article, including Mike, feel can be overcome.
It’s “technically possible to structure a CLO ETF as a UCITS, just as there are already UCITS CLO Income funds, with the same sorts of underlying securities,” Mike explained to LCD News. “The issues for an ETF arise from whether there is a sufficiently broad, tradable pool of such assets and well-matched buyers and sellers.”
Mike went on to note that a UCITS manager has to “determine who it is appropriate to target the fund at.” In his view, a CLO ETF would likely be classified as “complex” for MIFID II purposes and therefore only deemed suitable for the more sophisticated end of the retail market, which would lessen its attraction. “It may well be that the manager also considers a higher minimum investment is required to deter smaller retail investors,” Mike added.
Read the article here. (subscription required)
