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With the active fixed income ETF roster emerging alongside the evolving interest rate environment, Jaime Arevalo, multi-asset portfolio manager at Schroders, described the arrival of Europe’s first collateralised loan obligation (CLO) ETF as “interesting”.
Within the fixed income buckets of Schroders’ portfolio, ETFs are predominantly used “as a cost-efficient route for getting exposure to a certain part of the curve”, Arevalo said.
While the Federal Reserve’s decision to cut its Funds Rate by 50-basis points (bps) did not prompt Arevalo’s team to recompose its asset allocation, he noted they are targeting high quality credit and shortening duration.
Arevalo added his team has been exposed to a broad range of securitised credit “for some time”.
“We have global exposure through an active fund capturing ABS, CLOs and more, though this is an enhancement rather than core component of our fixed income position.”
However, he said the arrival of Europe’s first CLO ETF, the Fair Oaks AAA CLO UCITS ETF (FAAA), was an “interesting” development and added “it would be useful” to have more ETF launches in the space.
He added new ETF entrant Janus Henderson – which recently applied to launch a Luxembourg-domiciled CLO ETF – would be “well-placed to provide that kind of exposure”.
“Sometimes, there are exposures you want to have in the portfolio, particularly in fixed income, but no vehicles which are affordable as you have to pay for expertise to capture these asset classes,” Arevalo said.
Small caps are back
On the equity front, Arevalo said his team had been rebuilding a small cap position prior to the Fed rate hike in September, adding a 1% allocation to the Russell 2000 index.
“The goal is for this to be tactical and not a main driver of our performance,” he added. “But it has been a good call to size up the small and midcap segment ahead of the Fed rate cut decision.”
“We understand the risks of allocating to this segment. If fears of a recession are realised and we see more turbulence in the US, one segment that will be hurt is small and midcaps – but for now, we do not see an immediate recession.”
An eye on China
Finally, Arevalo noted increased interest in China exposure, on the back of policymakers implementing the largest monetary stimulus package since the 2008 Global Financial Crisis (GFC), spurring some China equity ETFs to gain more than 50% in a month.
“We do not have a direct exposure to China right now, but we are very interested in understanding what is happening and the extent of potential stimulus in future.”
“The issue that we see is a lack of clarity around how to fix the structural issues in China’s real estate market, which is problematic given the middle class has been the primary driver of internal consumption and their savings are largely invested in property. Fixing structural issues in Chinese property is going to be key for consumer behaviour,” he concluded.
