As investors look to take advantage of attractive yields in fixed income, one area of the market is often overlooked — securitized products. The space encompasses several different types of products, each generally created from pools of assets. They include mortgage-backed securities, collateralized loan obligations, commercial mortgage-backed securities and asset-backed securities. High-quality CLOs, for example, can pay yields over 6%. Investors are often under-allocated to the “true opportunities” across the sector, said Nuveen’s Nick Travaglino, lead portfolio manager for the firm’s multi-sector fixed income strategy and head of its securitized products team. Nuveen has $75 billion in securitized assets under management. Investors often just focus on agency mortgage-backed securities, which are high quality and part of the core fixed-income market, he added. “It’s not quite the best opportunity that’s available across the securitized product landscape,” Travaglino said. “You’re missing out on CMBS, you’re missing out on ABS and opportunities in mortgage credit.” There may also be what he calls a misperception about the assets’ complexity, he noted. The 51% allocation to securitized credit in Nuveen’s Strategic Income Fund produced 64% of the fund’s return in the first quarter, the firm said. Right now, securitized products in general look relatively cheap, said John Kerschner, head of U.S. securitized products and portfolio manager at Janus Henderson Investors. “If you look at historical spreads, securitized product spreads today are wide … versus corporate credit, which is almost at all-time tights,” he said. “You add that to the fact that the yield curve is inverted. So you’re getting a higher yield by investing at the shorter end — and most securitized products are issued at the shorter end of the yield curve.” To meet this need, Janus launched its Securitized Income ETF (JSI) in November, which invests across the securitized space. It has a 30-day SEC yield of 6.71% and a net expense ratio of 0.50%, per Morningstar. JSI YTD mountain Janus Henderson Securitized Income ETF Collateralized loan obligations Another fund Kerschner manages is the Janus Henderson AAA CLO ETF . It focuses on high-quality collateralized loan obligations, which are securitized pools of floating-rate loans to businesses. The ETF has grown by more than $3.6 billion so far this year to reach a total of about $9.48 billion in assets, according to the firm. It has a 30-day SEC yield of 6.72% and net expense ratio of 0.21%. Bank of America, which recently initiated coverage of CLO ETFs , named JAAA its top-rated CLO fund. Kerschner believes AAA CLOs have a role to play due to the fact that they are floating-rate loans and interest rates are expected to remain high for a while. It can also be some protection against a move higher in rates, he said. “You can have something that’s giving you safety with a high yield and basically no interest rate risk, that’s going to fit for the vast majority of people out there,” he said. Meanwhile, Rick Rieder, BlackRock’s chief investment officer of global fixed income, is also bullish on CLOs due, in part, to the fact that their spreads are still pretty wide. He also said the yields are attractive at around 6.3% or 6.5%. “Think about your ability to compound return at 6.5%, for round numbers, on a triple-A asset,” he said. “I’ve been doing this for over 30 years. That doesn’t happen.” Rieder said he recently added exposure to high-quality CLOs in his BlackRock Flexible Income ETF . The fund, which has a 30-day SEC yield of 5.96% and a net expense ratio of 0.40%, has about 11.42% in CLO securities, as of May 16. The firm also has its BlackRock AAA CLO ETF , which has a 6.76% 30-day SEC yield and an expense ratio of 0.20%. Commercial mortgage-backed securities Another part of the market is CMBS, which has gotten a bad rap due to the office vacancies that have plagued the sector since Covid. Office loan delinquencies rose to 6.4% in April, the highest level since June 2018, according to a recent report from Moody’s . Rieder would stay away from offices, but said there are other areas within CMBS that are very attractive. “The beauty of commercial real estate today or commercial mortgages is that there are a lot of potential buyers and lenders that are not there, i.e. a lot of the banks,” he said. In addition, “because the office market is so fractured, it’s provided real opportunity in multifamily, logistics, warehouse, [and] hospitality.” One way investors can get broad exposure to CMBS via BlackRock’s iShares CMBS ETF . CMBS YTD mountain iShares CMBS ETF year to date However, Janus’ Kerschner pointed out that all office work isn’t going away. “The headline risk has been very high,” he said. “That’s causing a lot of opportunity in that market for very good buildings, where the sponsor is committed to the building, putting a lot of capital expenditure … into the building.” Within CMBS, he also likes hospitality as Americans continue to travel, and data centers, which will get a boost from artificial intelligence. Nuveen’s Travaglino is simply being very selective when it comes to CMBS, including offices. “Generally speaking, the CMBS market in 2024 has recovered much of the spread widening or underperformance that was realized over the last two to three years, but it still has a ways to go,” he said. “There’s still opportunity there.” For instance, loans taken out in 2014 or 2015 on high quality buildings were purchased at a price that was lower than it was in 2020 and even in 2024, he said. Those holders have the negotiating power to extend existing terms when the loans come up on maturity, he said. “It’s a favorable scenario for everyone. We think there’s value in the market mispricing that,” he said. Another thing he focuses on is single-asset, single-borrower loans, as opposed to deals that may include a number of buildings in different areas of the country. It can be a particular building in a fast-growing area that has significant occupancy locked up for 10 years, he said. It can also have really good credit characteristics that he and his team can augment with more localized economic research to identify really attractive opportunities, he said. Mortgage credit Travaglino also likes credit risk transfer securities by Fannie Mae and Freddie Mac, which are issuing high-quality loans. “When they then issue low investment grade to below investment grade issues — triple B through single B paper — structurally off of that high credit quality borrower, I think that’s a really attractive combination,” he said. Spreads in mortgage credit have tightened, but Kershner thinks they still have a way to go. “People don’t want to sell their houses. They don’t want to give up those 3%, 3.5% mortgages,” he said. We’re not building enough shelter in this country, particularly the single-family level.”
