NYSE Active ETF Updates

Q&A with Janus Henderson

This week we sit down with Jessica Shill at Janus Henderson to discuss the company’s views and support of the active ETF market.

Janus Henderson’s active ETF suite now includes 10 ETFs across both equity and fixed income with more than $6.5 billion in AUM, including nearly $3.0 billion in NYSE Arca-listed JAAA. How has the active ETF market for fixed income ETFs evolved since JAAA listed in late 2020?

Markets have proven more volatile in recent years and investors have shown greater interest because of the combined benefits of active management and the ETF structure.

In addition, the changing composition of the U.S. bond market over the last decade has contributed to the rapid growth of active fixed-income ETFs. Passive index-related strategies have become more concentrated in government debt, which tends to have lower yields relative to other areas of the fixed income universe.

In our view, the interest in actively managed ETFs will continue to expand within fixed income because portfolio management teams can add value while managing risk.

Why did you decide on the ETF wrapper for your CLO ETFs (JAAA)? And why actively managed?

We have a long history of investment in the collateralized loan obligations (CLOs) market, and we felt that the market was large and liquid enough for an ETF wrapper. Additionally, we believe the ETF wrapper is the most liquid and transparent way to give investors access to the CLO market.

There are two reasons why the Fund is actively managed:

What trends do you see in the fixed income market that could benefit CLO ETFs, and which trends could create headwinds?

Short-term interest rates have risen far more than intermediate- and long-term rates in the current tightening cycle. The resulting inverted yield curve has presented investors with the rare opportunity to earn higher yields with less interest-rate risk. In our view, AAA-rated CLOs currently offer a compelling option to access higher yields within the short-duration universe.

Much of the downside in the CLO market today centers around weakening fundamentals in the bank loan market and increasing recession risk. Downgrades and defaults in loans continue to increase, and we expect this to continue through year-end 2023. That said, we believe that this downside is currently priced into CLO spreads as all tranches are still trading wide of historical averages.

Additionally, the arbitrage gap is presently a headwind for the CLO primary market as it is not economical for most issuers to issue a deal at current levels. Therefore, we expect issuance to remain muted in 2023.

What are the key considerations that investors should contemplate when considering actively managed ETFs?

In our view, there are three considerations: The principal investment strategy, portfolio construction, and liquidity of the vehicle.

The principal investment strategy is different across all outstanding CLO ETFs. Some funds allow for investing across the CLO capital stack, while others allow for investment in both middle market and broadly syndicated CLOs. It is imperative to understand these differences because the risk-reward profiles of these funds could vary greatly.

Additionally, it is important to know how each manager manages their portfolio (for example, how are they selecting what issuers to buy, are they sourcing from the primary or secondary market, etc.) to better understand how the fund will be managed going forward.

Perhaps the most critical consideration is the liquidity of the ETF, since that is ultimately what investors are buying. Investors should consider what percentage of the fund’s total AUM their investment will be, how many shares trade daily, and what the bid/ask spread of the vehicle is, as these will all affect the execution level of the purchase and sale of the fund.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.

OBJECTIVE: Janus Henderson AAA CLO ETF (JAAA) seeks capital preservation and current income by seeking to deliver floating-rate exposure to high quality AAA-rated collateralized loan obligations (“CLOs”).

Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.

Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.

An inverted yield curve occurs when short-term yields are higher than long-term yields.

Quantitative Tightening (QT) is a government monetary policy occasionally used to decrease the money supply by either selling government securities or letting them mature and removing them from its cash balances.

Tranches are segments of a pool of securities that are divided up by credit rating, maturity, or other characteristics.

Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus Henderson at 800.668.0434 or download the file from janushenderson.com/info. Read it carefully before you invest or send money.

Past performance is no guarantee of future results. Call 800.668.0434 or visit janushenderson.com/performance for current month-end performance.

Janus Henderson Distributors US LLC Janus Henderson Investors US LLC is the investment adviser and ALPS Distributors, Inc. is the distributor. ALPS is not affiliated with Janus Henderson or any of its subsidiaries.

Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

JNS001850

C-0623-50092 10-15-2023