Awesome overview of CLO tranches and how and where EIC, ECC, and JBBB play in this. That risk tranche graphic with the ETF overlays, is the best visualization I've seen. Not sure what your pre-retirement gigs were, but you are clearly an excellent educator!
Lots of interest here in a well-done presentation. Good discussion of the difference between ETF and CEF vehicles to access this asset class, but a BIG additional difference is that CEFs use leverage. That's why CLOZ pays 9% and EIC pays about 15%, with much the same assets. Leverage is usually a good thing with high spread assets like CLO equity and junior debt. The highest yielding vehicles are CLO equity CEFs like ECC, OXLC, OICC, all yielding 18-20%.
That's a good point. I could have mentioned the absence of leverage in CLOZ. EIC also includes some equity tranches which offer higher yields, but the leverage moves the needle more.
Good breakdown. I'm on a similar journey and everything you said agrees with what I have learned. I bought ECC earlier, which has a good yield but significant capital erosion. Thanks for making me aware of CLOZ.
Great deep dive - as always I love the graphics and illustrations. On this Thanksgiving I am giving thanks for this channel and all the invaluable information it provides.
I was about to comment with my risk concerns, but you covered it! Only thing I'd point out, then, is that JAAA's yield is only slightly higher than SGOV at the moment, making it barely worth the risk. But long term, its yield has been much higher. So maybe it's more worth the risk in a low rate environment.
It's a challenge to figure out how much extra yield is worth the risk. SGOV lowered its dividend after I recorded this episode so the difference is a bit wider now.
This is a much better explanation of of collaterized loan/debt (a loan is by definition a type of debt). Thank you. I think a big aspect beyond just the debt rating (which is very important) is the underlying business & assets. While this should be factored into the debt ratings, there is a lag in when debt is re-classed (and it's almost always a downgrade). A debt can be rated highly due to current and future prospects, but that can change before it reaches maturity. Sometimes it can take months, quarter, or even longer before it's announced. Diversification is good, so a broad mix of investments is wise. I personally like the etf with preferred shares of most utility companies that is slightly leveraged as a bond-like/fixed incomesque holding.
Hi, love your channel you do a great job. Your presentation of CLOZ makes a compelling case for owning TLTW, I already own a position in it, I agree wholeheartedly with you that no one really knows how rates will move, hence the volatility in TLT (long bonds in particular) really plays well into the TLTW model. It may not be for you as it yields about 17 percent but I would say that most of the people who watch your channel and are income oriented have a diversified portfolio. Which is wise.
Thanks for your kind feedback! I don't currently own TLTW because it's more binary...meaning it does well (in terms of price) when rates on long duration treasuries fall but not when rates rise. Having said that, if you get it wrong, the high income provides a cushion.
Hello. I have been investing in CLOZ for the past few months. No selling, just buy and hold. I’ve been very impressed with the capital preservation so far no erosion. I’ve also noticed that it doesn’t fall off the cliff at the end of the month like some CLO funds do. I’m sure there will be some volatility going forward. Also, the fund manager resigned, and he was replaced by someone new. From what I understand, the new team has experience. I guess we will find out.
Thanks, Armchair, for an interesting presentation on CLOZ. I have never really considered a CLO-focused fund but dig deeper into CLOZ, JAAA and JBBB after watching your video presentation.
Masterful & timely analysis of the pros and cons of CLOZ vs. other similar funds with different credit portfolios. Armchair reads and synthesizes the SA analysis which Couch investors like me benefit from and delivers in clear, personable, articulate English/Australian (?)
Thanks for the awesome video. Great info. I was looking for another position to add to my portfolio. I'm liking the looks of CLOZ and will be making it about 2% of my portfolio. Treating CLOZ like PBDC with BDCs.
Glad it was helpful. I think CLO's should be viewed as a spectrum and consider creating a blend of the various levels of credit risk and yield to get the level that works for you.
Thanks, that was a good explanation. The small spread between JAAA (6.4%) and CLOZ (9%) doesn't quite seem to justify holding the higher risk funds to me at this time though.
First heard about this fund on the Income Architect. Now it’s got the Armchair Income seal of approval. I’ll be buying soon, too many good funds out there, not enough money to buy them all 😂
Love your videos. This one on CLOs got me looking into this type of investment. Thought I'd mention that your explanation of how they work is, however, a bit incorrect. The underlying "leveraged" loans are "All" non-investment grade by definition (loans made to lower rated companies). The traunch categories all use the same full pool of loans (loans are not split up into different risk categories). The CLO traunches are levels of "who gets paid first" with what is left over falling through to the next lower category in a waterfall fashion. It is common for loans to default within a CLO, but the losses are (so far always) paid for by the lower traunches.
Thank you for your feedback. I mostly agree with your feedback. I didn't go into the waterfall aspect of CLO structure and, I agree, it's relevant. I was over simplifying. AAA gets paid first and equity gets paid last. I should also clarify the difference between defaults on loans inside CLO's and default rates on the CLO's themselves. The default rate for CLO's is very low; less than 1% per the chart from the video. In the future I hope to interview a CLO fund manager to get into this level of detail.
Love learning about new income options. I am years away from retirement, but this is still very interesting. Never heard of CLOs before. Thank you sir.
Good episode again ! As a foreign investor vs US market, how do you manage taxes between different income sources? Have you a flat taxes rates on foreign income and what are taxes in the country you’re in? Does the foreign investor situation made for to be taxed on all the same rate between capital gain, ROC, regular dividends and Interests?
My personal tax situation is different from the majority of (US) viewers so I don't go into detail on it. Non-US tax residents enjoy some benefits when investing in US markets, depending on the nature of the tax treaty (if applicable) between their tax residency Country and the US. Some benefits include an exclusion from capital gains tax. There are different tax rates for each type of income...qualified, ordinary, etc.
Another incredible video...thank you! Any idea why JAAA's dividends were so low in 2021 and started to ramp up in 2022? CLOZ didn't exist in 2021/2022 so wondering if dividends for it would be quite a bit less for it too due to the same/similar CLO-related conditions. For those in the US that are interested, according to a Seeking Alpha article, CLOZ is not tax advantaged so best in a retirement account (IRA, etc).
These are all floating rate loans, so they will track the overnight rate set by the fed. The difference in yield btw the risk free yield (T-bills) and another floating rate bond is called the 'credit spread'. JAAA's yield was 6.3% TTM, T-Bill were paying around 5.2% TTM, so the spread is around 1% for JAAA. In 2021 T-bills were paying basically nothing and JAAA was paying 1% over basically nothing. CLOZ yielded 9% TTM, so it could go down to as low as 4% if we go back to ZIRP.
Yes, CLOZ distributes ordinary income so an IRA makes sense. CLO's are floating rate so the income will move up and down with the Fed Funds rate. Currently, the rates are high :)
Thank you for video. Still working currently but ETF and CE portfolio about to cover expenses. Curious about either adding a CLOZ vs increasing my current BXSL position. For some reason having John Gray at blackstone in my corner vs Panagram.....which seems to have an extremely small management team. These CLOs mark to market so trying to get handle on the impact on yield if rates have peeked. Also looking at ISD managed by PGIM one of worlds best fixed income managers. 16 holding right now looking to get to 24 so looking to add -thanks again this channel is truly best in class.
Thanks for your kind words. I like BXSL too, however, it is just one company so there's concentration risk. I'll look further into Panagram because I don't know much about them either.
At face value...this seems like it would be a good compliment to SVOL for the income part of a portfolio. Interested to see how you weight CLOZ vs the other top tier income players.
The problem with this is the tax bill at the end of the year. As CLOs pay interest income, the distributions from CLOZ are taxed at ordinary income and that’s brutal! Basically take that 9% and cut it in half after taxes. Now what?
You could hold both! I don't hold PFLT but it's a Business Development Company. Even though it makes floating rate loans, it's quite different from CLOZ. BDC's underwrite and manage their own individual loans and may take equity positions as well. CLO's funds like CLOZ buy CLO's that each contain hundreds of business loans (also floating rate). The CLO's are set up to comprise of very specific credit ratings. So PFLT is a lender and CLOZ is an investor in loans that were initiated by other parties.
I think you may have mis-interperated the way the loans are pooled. All the loans in a CLO are typically below investment grade, BB or below. What gives the AAA tranche its rating is that they get paid before anyone else. The tranches below only get paid after AAAs obligations have been met. If you assume 75% recovery for default with the collateral, even with 100% default rate, AAA (~65% of a CLOs bonds) & AA (~10%) would still get their money back. As long as the collateral in the loans is good, the BBB & BB tranches could cope with pretty high default rates, (~20%) before any loss of capital as well. The equity tranche takes on the majority of the risk
Thanks. You make a great point. I have over simplified it. The waterfall structure of CLO's is what makes the upper tranches less risky. In a future episode I'd like to get into the mechanics of how that works, ideally with a CLO fund manager.
That's not an effective long term strategy. I recommend 1/ Check if your country has a tax treaty with the US that lowers the dividend withholding amount. Many countries are at 15% 2/ File a tax return with the IRS as a foreigner and you will only pay the tax due (which is usually far less than 30%). The IRS will send you a check for the difference.
If we think there will be a correction or recession in the next two years which causes CLOZ to drop 10% again, does it not make more sense to hold JAAA with just 3% lower? After tax you would have to avoid a recession for over 2 and a half years before the extra income CLOZ provides allows you to fall 10% and still ahead. Personally I’m all in on JAAA.
That's a personal choice based on your risk tolerance, and approach to volatility. Personally, I'm not sensitive to the value of my portfolio dropping for 1-2 years if the income is consistent. If the value of your portfolio dropping is an issue, then JAAA aligns more closely with your goals than CLOZ.
for Snowball, if i am just getting started, is there any reason to do the "investor" pckg over the "starter"?....my plan is to be be diversified over about 20 stocks
I think Starter is enough for most people. The main difference is that "Investor" gives you the option to simultaneously hold multiple portfolios...eg. a growth and an income, or a taxable and an IRA, etc.
Great video. Just in case you don’t mind: You mentioned you’re an expat to make your income stretch and I think you may have mentioned SE Asia. Which country do you live in?
I don't give into my personal info on RUclips but if you join the Armchair Income Community we have more open discussions and meetups. Here's the link: facebook.com/share/g/1H71aTgXmt/ Generally speaking though, I spend time in Vietnam, Thailand, and next year, Bali, and Kuala Lumpur.
If interest rates are going lower will the income be lower and the stock price too? It seems to be a better recommend when interest rates are going up?
Yes, the lower interest rates go, the lower the income will go. There will be a delay of a few months before the impact is felt. I don't know if interest rates will go down slightly or a lot, or whether they'll reverse and go up again!
Do you allocate your assets to have diversification between the different asset classes? Ik your investing in more alternative classes, are you spreading them to reduce risk?
Exactly! I'm more focused on diversification to reduce risk than I am on maximizing returns. I'm looking for consistent income, regardless of market conditions.
@@armchairincomechannel yeah even though I’m in my late 20’s I want the same thing. I’m just now checking out strategies for high yield and conservative, predicable cashflows
Is Seeking Alpha’s Quant score missing something with CLOZ? It rates it a “sell.” Love your videos and thought this question would be of interest because it’s not uncommon to see low Quant scores for these income generating funds.
I don't use the quant score because its focused on appreciation and I'm focused on income. I assume that most of CLOZ's best appreciation has already occurred because interest rates have peaked so its not a great buy from an appreciation perspective.
Interest rates are high at the moment. My question is, when rates finally drop back down to "normal" levels, how much will CLOZ's 9% distribution lower? For example, if interest rates were to drop 2%, would CLOZ then yield 7% ???
In round numbers, yes. The distributions will rise and fall with the Fed Funds rates (after a short delay). I don't know which way rates will go so I'm just enjoying the steady income for now. If rates fall substantially then these CLO's may lose their appeal.
The fund seems solid, but a concern is that its management team apparently resigned recently? Not clear what happened but this raises a potential flag. Would be good to get some insight into this.
Yes, that's a good point. I haven't been able to find any background or explanation on why he resigned or the extent to which his departure affects the ability of portfolio managers to continue delivering consistent results. It is something to consider, and the bottom line is I'll start with a small investment and wait for more information (or time to pass) before adding to it.
Hi, and thanks! I have not bought CLOZ yet. That's why I issue the newsletter...things change after I release a video! In this case, I still don't have a good sense of how the new management will do after the CEO left in November 2024. Also, the latest distribution was lower than previous ones. For these reasons, I bought JBBB while I'm waiting. I'll keep an eye on it!
Wondering what your thoughts are on the CEO and other key partners resigning from Panagram earlier this month. I've watched a few videos from the former CEO John Kim and liked his approach. That team was billed as CLO experts so I'm wondering if the future management of the fund will be as good going forward.
Yes, that's a good point. I haven't been able to find any background or explanation on why he resigned or the extent to which his departure affects the ability of portfolio managers to continue delivering consistent results. It is something to consider, and the bottom line is I'll start with a small investment and wait for more information (or time to pass) before adding to it.
Great video. Great channel but can I make a suggestion? Reduce your ads and promos. I believe it accounts for a disproportionate amount of your content.
Thanks for your feedback. It was a bit heavier this week because of Black Friday. During the interview with Dave 2 weeks ago there were zero promotions. Still working on the right balance.
"Dumb Money" is a movie about people using social media to drive up the price of a stock far beyond its intrinsic value. CLO's are pools of business loans, organized by their credit rating, with a historical default rate of less than 1%. I don't see the parallel. Perhaps you're thinking of CDO's, they're a different story.
Given the lower default rate than corporate bonds, I think the biggest risk is price volatility during a correction, rather than a substantial change in income.
I would say that AAA is the lowest risk, but risk to return ratio is a different matter. If JBBB paid a lot more but was only slightly higher risk then it would be an attractive risk return. The yields on these are constantly changing but the market generally keeps the risk return in line for each level of risk....meaning if JBBB DID become a great risk return opportunity, more investors would buy it, driving up the price, and lowering the yield.
@@armchairincomechannel Thanks for the reply! Maybe you can correct me but I think we might be agreeing in some sense. The spread between JAAA being tighter than JBBB would imply there is a greater appetite for AAA CLOs, and I think you would agree given the current market composition being about 70% AAA. JBBB offers about 200-300 extra basis points over JAAA but you end up with a significantly smaller default threshold, so why would it make sense over for example maybe purchasing something like JAAA when the spread is wider - arguably it would be a much safer strategy and potentially as lucrative and you get the seniority benefit in securitization as well as the overcollateralization? Additionally, given the recent macroeconomic trends such as tarrifs, wouldn't it make sense to probably stay clear of anything not in AAA/AA? Default rates could realistically cause issues for the mezzanine and equity tranches in the foreseeable future.
Yes, that's a good point. I haven't been able to find any background or explanation on why he resigned or the extent to which his departure affects the ability of portfolio managers to continue delivering consistent results. It is something to consider, and the bottom line is I'll start with a small investment and wait for more information (or time to pass) before adding to it.
Too much concentration in one company's ability to shift from an addictive product to a future that is unknown. I love the dividend history but the path to a new product that continues that amazing trend is unclear. I also don't like the unknowns associated with the regulatory environment in that sector. The government can change the taxes, disclosure warning requirements etc. If you follow the tobacco industry then perhaps you have an insight.
Yes, they both hold senior loans, but CLOZ uses CLO's which more clearly define the credit of the loans. CLOZ has outperformed SEIX for total return since its inception.
I like sharing what I learn....the good, the bad, the risks, the opportunities. Not everybody wants to do that, but I enjoy the community of income investors associated with Armchair Income. They're a nice bunch of people.
M2 is expanding at near 10%. Inflation at best around 3+ (and that's only if you believe govt numbers, which I don't ...) So ..."9%" from derivatives of derivatives is not that appealing to me.
Well there is a relatively new, perfectly scarce asset which has achieved a 150% CAGR over its 15 year life. Over that same time span gold was 5% and SP was 12%. I will leave it to readers to take a guess and confirm those numbers for themselves. Many people I find would rather stick to their preconceptions than get wealthy, which is odd to me. Shrug.
@@DM-dq9dlyeah man tulip bulbs were replacing the Dutch guilder. If it was me I would study some history, learn what money is, question my own assumptions. But you do whatever works for you. I wish you well …my math stands.
That's a good question. It depends how you define "good". The prices move down slightly in 2022 for JBBB and to a lesser extent, JAAA (it barely moved). I don't know for sure, the cause of that mild correction (ie far less than the market) but I'm assuming it was the fearful sentiment during the bear market of 2022. Putting aside that minor price volatility, as rates rose in 2022 and 2023, CLO's became more attractive in that they delivered an increasing amount of income. If we define "good" as the income received, then high rates have been and will be better for CLO's than low rates.
Your average retail investor has no way of assessing the risks that are involved with these products, imho. There's a non-zero chance of losing your entire investment if the tranche gets wiped out with enough defaults. Calculating this probability requires knowledge of how the defaults are correlated and what's likely to happen to those correlations if the market suffers a downturn. That's something even the professionals struggle with. Tread carefully !
The historical default rate for CLO's is less than 1% so I don't see "wiped out" as a likely outcome for the AAA or BBB tranches. As you move down the tranches of course the risk increases, culminating in the equity tranche which only gets paid after all the other tranches. I agree that caution is warranted but I think this investment class is worthy of consideration for income investors. If you're aware of an asset class with less volatility, higher yield, and less default risk....I'm all ears!
Ah yes, the Cary Grant of Armchair investing is still out on safari and bringing meaty dividend stocks back to his hungry village. Thanks for your efforts.
@armchairincomechannel But only if it's in the Armchair Income budget. Then again, keep the golf shirt and casual wear. A double-breasted jacket and high-waisted trousers might alienate the meat-and-potatoes fixed-income crowd.
Yes, it's young. That's one of the reasons I'll start with a small allocation. JAAA and JBBB have a longer history. I'm also cautious about the recent change of management.
Both are in the floating rate loan world. BDC's underwrite, issue and manage their own loans individually and may take an equity position. CLO funds buy bundles of hundreds of loans that were created by others. Also CLO's are more specific about the credit ratings. Basically, BDC's are lenders and CLO's are investors in loans.
Sort of...the bundled mortgage loans led to the 2008 crash, specifically...Mortgage Backed Securities (MBS'). These loans are business loans...nothing to do with mortgages. Default rates for CLO's during the 2008 crash were very low.
As I explained in the video, CDO's include mortgages, whereas CLO's hold business loans and not mortgages. They're not the same thing. If you'd like a more detailed breakdown of all the differences, see this article: www.vaneck.com/us/en/blogs/income-investing/clos-vs-cdos-understanding-the-difference/#:~:text=As%20a%20generic%20term%2C%20CDO,that%20invest%20in%20leveraged%20loans.
@@danstevens64 A loan is a type of debt. Just as Mr Armchaired explained, these are bundled loans which are sold in "tranches" with varying degrees of credit risk/ratings. The only difference is that CLO are bundled business loans... and CDOs are bundled mortgages. It would not surprise me depending on who you are speaking with, they may use it interchangeably. An analogy maybe what's the difference between a taxi driver and an Uber driver? They are different, but essentially the same.
You're welcome to share the income investment strategy that comfortably exceeds 9%/year. BTC delivers higher returns but during crypto winter it doesn't pay the bills. If you can sell enough at the top to last the winter then it could work.
The big difference here is risk. Your bank CD is practically zero risk. The yield is guaranteed by the bank. Your balance will never go down, and even if the bank fails, the money is usually insured by the government (FDIC in the case of US banks, up to $250k) These high-yield funds carry risk. Your balance can go down. The yields are not guaranteed. Bank customers are not getting screwed. They are just taking less risk for lower returns.
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Awesome overview of CLO tranches and how and where EIC, ECC, and JBBB play in this. That risk tranche graphic with the ETF overlays, is the best visualization I've seen. Not sure what your pre-retirement gigs were, but you are clearly an excellent educator!
Thanks for your feedback. In my past life I worked in commercial real estate. Glad the visuals were helpful!
Lots of interest here in a well-done presentation. Good discussion of the difference between ETF and CEF vehicles to access this asset class, but a BIG additional difference is that CEFs use leverage. That's why CLOZ pays 9% and EIC pays about 15%, with much the same assets. Leverage is usually a good thing with high spread assets like CLO equity and junior debt. The highest yielding vehicles are CLO equity CEFs like ECC, OXLC, OICC, all yielding 18-20%.
That's a good point. I could have mentioned the absence of leverage in CLOZ. EIC also includes some equity tranches which offer higher yields, but the leverage moves the needle more.
To me leverage equals risk, the exact opposite of what I'm seeking.
Good breakdown. I'm on a similar journey and everything you said agrees with what I have learned. I bought ECC earlier, which has a good yield but significant capital erosion. Thanks for making me aware of CLOZ.
You're welcome. At the moment I'm liking JBBB. More about it coming in the next video.
Great deep dive - as always I love the graphics and illustrations. On this Thanksgiving I am giving thanks for this channel and all the invaluable information it provides.
I appreciate those kinds words. Hope you had a great Thanksgiving!
I was about to comment with my risk concerns, but you covered it! Only thing I'd point out, then, is that JAAA's yield is only slightly higher than SGOV at the moment, making it barely worth the risk. But long term, its yield has been much higher. So maybe it's more worth the risk in a low rate environment.
It's a challenge to figure out how much extra yield is worth the risk. SGOV lowered its dividend after I recorded this episode so the difference is a bit wider now.
This is a much better explanation of of collaterized loan/debt (a loan is by definition a type of debt). Thank you. I think a big aspect beyond just the debt rating (which is very important) is the underlying business & assets. While this should be factored into the debt ratings, there is a lag in when debt is re-classed (and it's almost always a downgrade). A debt can be rated highly due to current and future prospects, but that can change before it reaches maturity. Sometimes it can take months, quarter, or even longer before it's announced. Diversification is good, so a broad mix of investments is wise. I personally like the etf with preferred shares of most utility companies that is slightly leveraged as a bond-like/fixed incomesque holding.
Which etf is that?
You raise a good point, and it's difficult to assess that risk. I like preferred shares too!
I was wondering the same thing. Closest I have to that is PFFA, but they also have financial prefs.
First time here. Refreshing delivery and great info!
Glad it was helpful! Welcome to the Armchair Income Community :)
Thanks for the video. I've been impressed with CLOZ. Its now one of my biggest holdings.
Glad it was helpful. I plan to begin with a small allocation because it's young and experienced a recent change of management. Also looking at JBBB.
My Sunday go-to channel! Always happy to watch and learn while listening to your charming accent. I own iclo and jaaa. Will keep an eye on cloz.
Thanks for your kind words; great to hear :) Those 2 have been a nice steady 6% plus recently. Thanks for sharing.
Excellent Summary! CLOZ one of my favorites.
Awesome, thank you!
Continuing to build my income factory and these definitely look like candidates for further evaluation. As always, thanks for the video!
Great to hear!
Great video. Thanks. I did a video on CLOZ and I am currently building this one out. Living on my distributions like you. Have a great day.
You have a pretty decent channel too 👍🏽
Hi! I watched that video and enjoyed it. Thanks for watching and commenting.
Hi, love your channel you do a great job.
Your presentation of CLOZ makes a compelling case for owning TLTW, I already own a position in it, I agree wholeheartedly with you that no one really knows how rates will move, hence the volatility in TLT (long bonds in particular) really plays well into the TLTW model. It may not be for you as it yields about 17 percent but I would say that most of the people who watch your channel and are income oriented have a diversified portfolio. Which is wise.
Thanks for your kind feedback! I don't currently own TLTW because it's more binary...meaning it does well (in terms of price) when rates on long duration treasuries fall but not when rates rise. Having said that, if you get it wrong, the high income provides a cushion.
Hello. I have been investing in CLOZ for the past few months. No selling, just buy and hold. I’ve been very impressed with the capital preservation so far no erosion. I’ve also noticed that it doesn’t fall off the cliff at the end of the month like some CLO funds do. I’m sure there will be some volatility going forward. Also, the fund manager resigned, and he was replaced by someone new. From what I understand, the new team has experience. I guess we will find out.
Thanks for sharing your experience. I'm also interested to learn more about the new management team at CLOZ.
Thanks, Armchair, for an interesting presentation on CLOZ. I have never really considered a CLO-focused fund but dig deeper into CLOZ, JAAA and JBBB after watching your video presentation.
Glad it was helpful! There are so many interesting investment opportunities beyond the same old 10-20 that are always on CNBC.
Masterful & timely analysis of the pros and cons of CLOZ vs. other similar funds with different credit portfolios. Armchair reads and synthesizes the SA analysis which Couch investors like me benefit from and delivers in clear, personable, articulate English/Australian (?)
From the armchair to the couch....thanks Jim :)
Thanks for the awesome video. Great info. I was looking for another position to add to my portfolio. I'm liking the looks of CLOZ and will be making it about 2% of my portfolio. Treating CLOZ like PBDC with BDCs.
Glad it was helpful. I think CLO's should be viewed as a spectrum and consider creating a blend of the various levels of credit risk and yield to get the level that works for you.
Thanks, that was a good explanation. The small spread between JAAA (6.4%) and CLOZ (9%) doesn't quite seem to justify holding the higher risk funds to me at this time though.
That's a good point. Difficult to measure the exact spread that makes sense but another percent or two would make it more compelling.
You did a great job reviewing this fund and making it easy to understand. Thank you.
You're very welcome! That's what I was hoping to achieve :)
First heard about this fund on the Income Architect. Now it’s got the Armchair Income seal of approval. I’ll be buying soon, too many good funds out there, not enough money to buy them all 😂
I know that guy
That's a good problem to have!
Love your videos. This one on CLOs got me looking into this type of investment. Thought I'd mention that your explanation of how they work is, however, a bit incorrect. The underlying "leveraged" loans are "All" non-investment grade by definition (loans made to lower rated companies). The traunch categories all use the same full pool of loans (loans are not split up into different risk categories). The CLO traunches are levels of "who gets paid first" with what is left over falling through to the next lower category in a waterfall fashion. It is common for loans to default within a CLO, but the losses are (so far always) paid for by the lower traunches.
Thank you for your feedback. I mostly agree with your feedback. I didn't go into the waterfall aspect of CLO structure and, I agree, it's relevant. I was over simplifying. AAA gets paid first and equity gets paid last. I should also clarify the difference between defaults on loans inside CLO's and default rates on the CLO's themselves. The default rate for CLO's is very low; less than 1% per the chart from the video. In the future I hope to interview a CLO fund manager to get into this level of detail.
Love learning about new income options. I am years away from retirement, but this is still very interesting. Never heard of CLOs before. Thank you sir.
Glad you enjoyed it! Often the boring or complicated investments get no coverage in the media.
Thanks for all the analysis and alternative ideas. I appreciate the transparency as well. Keep up the great product and effort. 👍
My pleasure! Thanks for watching.
Thanks for drawing attention to funds that might not make in my radar otherwise. I always learn something from your content.
Glad to hear it!
More great content! Thank you sir!!!
My pleasure! Thanks for taking the time to let me know :)
Good episode again ! As a foreign investor vs US market, how do you manage taxes between different income sources? Have you a flat taxes rates on foreign income and what are taxes in the country you’re in? Does the foreign investor situation made for to be taxed on all the same rate between capital gain, ROC, regular dividends and Interests?
My personal tax situation is different from the majority of (US) viewers so I don't go into detail on it. Non-US tax residents enjoy some benefits when investing in US markets, depending on the nature of the tax treaty (if applicable) between their tax residency Country and the US. Some benefits include an exclusion from capital gains tax. There are different tax rates for each type of income...qualified, ordinary, etc.
@ thanks for sharing! And your good contents!
I own JAAA, I like the idea of a mix for a blended yield
Thanks for sharing. JAAA has been a rock solid 6% plus recently.
Keep up the GOOD work.......always look forward to your content 😊
I appreciate that!
Another incredible video...thank you! Any idea why JAAA's dividends were so low in 2021 and started to ramp up in 2022? CLOZ didn't exist in 2021/2022 so wondering if dividends for it would be quite a bit less for it too due to the same/similar CLO-related conditions.
For those in the US that are interested, according to a Seeking Alpha article, CLOZ is not tax advantaged so best in a retirement account (IRA, etc).
These are all floating rate loans, so they will track the overnight rate set by the fed. The difference in yield btw the risk free yield (T-bills) and another floating rate bond is called the 'credit spread'. JAAA's yield was 6.3% TTM, T-Bill were paying around 5.2% TTM, so the spread is around 1% for JAAA. In 2021 T-bills were paying basically nothing and JAAA was paying 1% over basically nothing. CLOZ yielded 9% TTM, so it could go down to as low as 4% if we go back to ZIRP.
Yes, CLOZ distributes ordinary income so an IRA makes sense. CLO's are floating rate so the income will move up and down with the Fed Funds rate. Currently, the rates are high :)
Great explanation, thanks for taking the time to share that!
Thank you for video. Still working currently but ETF and CE portfolio about to cover expenses. Curious about either adding a CLOZ vs increasing my current BXSL position. For some reason having John Gray at blackstone in my corner vs Panagram.....which seems to have an extremely small management team. These CLOs mark to market so trying to get handle on the impact on yield if rates have peeked. Also looking at ISD managed by PGIM one of worlds best fixed income managers. 16 holding right now looking to get to 24 so looking to add -thanks again this channel is truly best in class.
Thanks for your kind words. I like BXSL too, however, it is just one company so there's concentration risk. I'll look further into Panagram because I don't know much about them either.
Great take. Cloz a JAAA have been really stable for me, with attractive yields.
Yes, JAAA has been as steady as a rock recently with a nice 6%+
Excellent presentation
Thank you! Cheers!
At face value...this seems like it would be a good compliment to SVOL for the income part of a portfolio. Interested to see how you weight CLOZ vs the other top tier income players.
I will start with a small weighting to CLOZ because 1/ It's new and 2/ They recently changed the management team.
Great video, learned alot
Glad you enjoyed it! I learned a lot from the research so am happy to hear you're into this topic too :)
Great explanation for this one brother! Wishing you wealth and prosperity in 2025.
Much appreciated! Best wishes for 2025.
"Could you create a video comparing JAAA, JBBB, ECC, and CLOZ ETFs, highlighting their differences and associated risks?
I'll take your suggestion into consideration. The next video to come out will address most of what you requested...
The problem with this is the tax bill at the end of the year. As CLOs pay interest income, the distributions from CLOZ are taxed at ordinary income and that’s brutal! Basically take that 9% and cut it in half after taxes. Now what?
You're right. If possible, do your dividend investing from a Roth account.
Everybody's tax situation is different. Sounds like ordinary income isn't ideal for you.
Why not PFLT? longer history, I think also floating rate fund, perhaps there are differences??
PFLT is a BDC so would that make them slightly different? Do BDCs hold more equity tranche as opposed to BB-grade? I genuinely don’t know
Pflt is rated a buy by some Wall Street analysts and many contributors on Seeking Alpha, but it is a BDC.
You could hold both! I don't hold PFLT but it's a Business Development Company. Even though it makes floating rate loans, it's quite different from CLOZ. BDC's underwrite and manage their own individual loans and may take equity positions as well. CLO's funds like CLOZ buy CLO's that each contain hundreds of business loans (also floating rate). The CLO's are set up to comprise of very specific credit ratings. So PFLT is a lender and CLOZ is an investor in loans that were initiated by other parties.
@@armchairincomechannel Never heard the difference explained that clearly. Thank you!
I think you may have mis-interperated the way the loans are pooled. All the loans in a CLO are typically below investment grade, BB or below. What gives the AAA tranche its rating is that they get paid before anyone else. The tranches below only get paid after AAAs obligations have been met. If you assume 75% recovery for default with the collateral, even with 100% default rate, AAA (~65% of a CLOs bonds) & AA (~10%) would still get their money back.
As long as the collateral in the loans is good, the BBB & BB tranches could cope with pretty high default rates, (~20%) before any loss of capital as well. The equity tranche takes on the majority of the risk
Thanks. You make a great point. I have over simplified it. The waterfall structure of CLO's is what makes the upper tranches less risky. In a future episode I'd like to get into the mechanics of how that works, ideally with a CLO fund manager.
@armchairincomechannel That would be an excellent episode. Keep up the good work!
Great video as usual!
Glad you enjoyed it!
I am thinking to sell CLOZ before and buy again on ex-div date to avoid 30% non resident tax on dividends
That's not an effective long term strategy. I recommend 1/ Check if your country has a tax treaty with the US that lowers the dividend withholding amount. Many countries are at 15% 2/ File a tax return with the IRS as a foreigner and you will only pay the tax due (which is usually far less than 30%). The IRS will send you a check for the difference.
@@armchairincomechannel Agree, I took a smaller position in OXLC, it is a leveraged CLO ETFs, it pays 20% dividends.
How do you find that information on what % of each tranche a CLO is invested or their focus is? Snowball?
The fund manager's website. Here's an example for JBBB cdn.janushenderson.com/webdocs/FactSheet_JBBB_ETF_2024_09_exp_2025_01.pdf
Okay, thank you! That helps a lot
If we think there will be a correction or recession in the next two years which causes CLOZ to drop 10% again, does it not make more sense to hold JAAA with just 3% lower? After tax you would have to avoid a recession for over 2 and a half years before the extra income CLOZ provides allows you to fall 10% and still ahead. Personally I’m all in on JAAA.
That's a personal choice based on your risk tolerance, and approach to volatility. Personally, I'm not sensitive to the value of my portfolio dropping for 1-2 years if the income is consistent. If the value of your portfolio dropping is an issue, then JAAA aligns more closely with your goals than CLOZ.
Thanks
You're most welcome!
for Snowball, if i am just getting started, is there any reason to do the "investor" pckg over the "starter"?....my plan is to be be diversified over about 20 stocks
I think Starter is enough for most people. The main difference is that "Investor" gives you the option to simultaneously hold multiple portfolios...eg. a growth and an income, or a taxable and an IRA, etc.
Great video. Just in case you don’t mind: You mentioned you’re an expat to make your income stretch and I think you may have mentioned SE Asia. Which country do you live in?
I don't give into my personal info on RUclips but if you join the Armchair Income Community we have more open discussions and meetups. Here's the link: facebook.com/share/g/1H71aTgXmt/ Generally speaking though, I spend time in Vietnam, Thailand, and next year, Bali, and Kuala Lumpur.
If interest rates are going lower will the income be lower and the stock price too? It seems to be a better recommend when interest rates are going up?
Yes, the lower interest rates go, the lower the income will go. There will be a delay of a few months before the impact is felt. I don't know if interest rates will go down slightly or a lot, or whether they'll reverse and go up again!
Do you allocate your assets to have diversification between the different asset classes? Ik your investing in more alternative classes, are you spreading them to reduce risk?
Exactly! I'm more focused on diversification to reduce risk than I am on maximizing returns. I'm looking for consistent income, regardless of market conditions.
@@armchairincomechannel yeah even though I’m in my late 20’s I want the same thing. I’m just now checking out strategies for high yield and conservative, predicable cashflows
Speaking of low credit ratings I think I have like 50$ in XCCC just to experiment
That's a spicy one!
Enjoyed the video.
Awesome, thank you!
Is Seeking Alpha’s Quant score missing something with CLOZ? It rates it a “sell.” Love your videos and thought this question would be of interest because it’s not uncommon to see low Quant scores for these income generating funds.
I don't use the quant score because its focused on appreciation and I'm focused on income. I assume that most of CLOZ's best appreciation has already occurred because interest rates have peaked so its not a great buy from an appreciation perspective.
Thanks for the video!
You're welcome!
Interest rates are high at the moment. My question is, when rates finally drop back down to "normal" levels, how much will CLOZ's 9% distribution lower? For example, if interest rates were to drop 2%, would CLOZ then yield 7% ???
In round numbers, yes. The distributions will rise and fall with the Fed Funds rates (after a short delay). I don't know which way rates will go so I'm just enjoying the steady income for now. If rates fall substantially then these CLO's may lose their appeal.
The fund seems solid, but a concern is that its management team apparently resigned recently? Not clear what happened but this raises a potential flag. Would be good to get some insight into this.
Yes, that's a good point. I haven't been able to find any background or explanation on why he resigned or the extent to which his departure affects the ability of portfolio managers to continue delivering consistent results. It is something to consider, and the bottom line is I'll start with a small investment and wait for more information (or time to pass) before adding to it.
LOL I have a bit of both TLT and SGOV so this is interesting thx!
Didn't mean to pick on those 2 :)
100th video! 🎉
You're keeping a count! It only feels like 93 ;)
Hi, new here. exelent videos,
So did you invest in this clo?
I down loaded your port, but its from May. dont see it on there?
Thanks
Hi, and thanks! I have not bought CLOZ yet. That's why I issue the newsletter...things change after I release a video! In this case, I still don't have a good sense of how the new management will do after the CEO left in November 2024. Also, the latest distribution was lower than previous ones. For these reasons, I bought JBBB while I'm waiting. I'll keep an eye on it!
@@armchairincomechannel Thanks!
Wondering what your thoughts are on the CEO and other key partners resigning from Panagram earlier this month.
I've watched a few videos from the former CEO John Kim and liked his approach.
That team was billed as CLO experts so I'm wondering if the future management of the fund will be as good going forward.
Saw that in the news. They didn’t give a reason, which is not good. I would stay away until they clarify it.
Yes, that's a good point. I haven't been able to find any background or explanation on why he resigned or the extent to which his departure affects the ability of portfolio managers to continue delivering consistent results. It is something to consider, and the bottom line is I'll start with a small investment and wait for more information (or time to pass) before adding to it.
@@armchairincomechannel Thanks for looking into it!
Great video. Great channel but can I make a suggestion? Reduce your ads and promos. I believe it accounts for a disproportionate amount of your content.
Thanks for your feedback. It was a bit heavier this week because of Black Friday. During the interview with Dave 2 weeks ago there were zero promotions. Still working on the right balance.
I like the CLO etfs, they tend to have low correlation with the rest of the market, which is good for storing value
I agree, and I'm always looking for new income sources with low correlation to existing ones.
I think I saw how this ends in the movie “Dumb Money”
"Dumb Money" is a movie about people using social media to drive up the price of a stock far beyond its intrinsic value. CLO's are pools of business loans, organized by their credit rating, with a historical default rate of less than 1%. I don't see the parallel. Perhaps you're thinking of CDO's, they're a different story.
Nice one
Thanks for watching :)
Love the idea of low volatility in CLOs, but is anyone else worried about the potential risks if the market panics? 🤨
Given the lower default rate than corporate bonds, I think the biggest risk is price volatility during a correction, rather than a substantial change in income.
To be fair isn't it only triple A CLOs that actually have the best risk return?
I would say that AAA is the lowest risk, but risk to return ratio is a different matter. If JBBB paid a lot more but was only slightly higher risk then it would be an attractive risk return. The yields on these are constantly changing but the market generally keeps the risk return in line for each level of risk....meaning if JBBB DID become a great risk return opportunity, more investors would buy it, driving up the price, and lowering the yield.
@@armchairincomechannel Thanks for the reply! Maybe you can correct me but I think we might be agreeing in some sense.
The spread between JAAA being tighter than JBBB would imply there is a greater appetite for AAA CLOs, and I think you would agree given the current market composition being about 70% AAA. JBBB offers about 200-300 extra basis points over JAAA but you end up with a significantly smaller default threshold, so why would it make sense over for example maybe purchasing something like JAAA when the spread is wider - arguably it would be a much safer strategy and potentially as lucrative and you get the seniority benefit in securitization as well as the overcollateralization?
Additionally, given the recent macroeconomic trends such as tarrifs, wouldn't it make sense to probably stay clear of anything not in AAA/AA? Default rates could realistically cause issues for the mezzanine and equity tranches in the foreseeable future.
Anyone have an opinion on BUCK
Haven't looked into that one. Simplify has so many ETF's its hard to keep up!
great video
Glad you enjoyed it
'zee'... You stayed too long in the States, mate. Yet another great, informative video.
You’re right! I thought about that. 90% of the viewers are in the US and don’t know what “Zed” is ;) will work on getting my accent back!
@armchairincomechannel Too right! I wanted to work in something about an act involving spiders but just couldn't figure out how to do so.
legit guy...like his product
did u buy cloz for your insider portfolio
Haven't bought CLOZ yet but I plan to add a small allocation soon. Will send out a new edition of Armchair Insider when I do.
Thanks for watching!
This is so funny I just bought some of CLOZ
You're one step ahead of me!
Does the recent, abrupt resignation of the CLOZ investment advisor CEO (and a number of his team) give you any concern?
Yes, that's a good point. I haven't been able to find any background or explanation on why he resigned or the extent to which his departure affects the ability of portfolio managers to continue delivering consistent results. It is something to consider, and the bottom line is I'll start with a small investment and wait for more information (or time to pass) before adding to it.
Good presentation but I am loaded up on JAAA and if I want the yield will dabble in EIC but cant justify the increase from JAAA to CLOZ
JAAA has been solid as a rock! I have some JBBB at the moment.
TV that even bigger than current TV...LOL
Isn't that was Black Friday sales are all about!
Got insight on MO? At a $1.02 a share and my current appreciation of 14.3% something must be in the weeds with this,,,,,,,,
Too much concentration in one company's ability to shift from an addictive product to a future that is unknown. I love the dividend history but the path to a new product that continues that amazing trend is unclear. I also don't like the unknowns associated with the regulatory environment in that sector. The government can change the taxes, disclosure warning requirements etc. If you follow the tobacco industry then perhaps you have an insight.
@armchairincomechannel Regulations. That didn't even accur to me. Well
thought out. Thanks!
How does this compare with SEIX? Seems similiar.
Yes, they both hold senior loans, but CLOZ uses CLO's which more clearly define the credit of the loans. CLOZ has outperformed SEIX for total return since its inception.
Vomit Comet 😂😂😂!
I'm glad somebody gets my humor :)
Why tell everyone if so good.
I like sharing what I learn....the good, the bad, the risks, the opportunities. Not everybody wants to do that, but I enjoy the community of income investors associated with Armchair Income. They're a nice bunch of people.
M2 is expanding at near 10%. Inflation at best around 3+ (and that's only if you believe govt numbers, which I don't ...) So ..."9%" from derivatives of derivatives is not that appealing to me.
If you don't like a 9% yield but you have a better suggestion....I'm all ears.
Well there is a relatively new, perfectly scarce asset which has achieved a 150% CAGR over its 15 year life. Over that same time span gold was 5% and SP was 12%. I will leave it to readers to take a guess and confirm those numbers for themselves. Many people I find would rather stick to their preconceptions than get wealthy, which is odd to me. Shrug.
Digital tulip bulbs?
@@DM-dq9dlyeah man tulip bulbs were replacing the Dutch guilder. If it was me I would study some history, learn what money is, question my own assumptions. But you do whatever works for you. I wish you well …my math stands.
Curios that if rates continue to go down they will become less attractive. Yet in 2022 when rates were going up they became less attractive.
That's a good question. It depends how you define "good". The prices move down slightly in 2022 for JBBB and to a lesser extent, JAAA (it barely moved). I don't know for sure, the cause of that mild correction (ie far less than the market) but I'm assuming it was the fearful sentiment during the bear market of 2022. Putting aside that minor price volatility, as rates rose in 2022 and 2023, CLO's became more attractive in that they delivered an increasing amount of income. If we define "good" as the income received, then high rates have been and will be better for CLO's than low rates.
Your average retail investor has no way of assessing the risks that are involved with these products, imho. There's a non-zero chance of losing your entire investment if the tranche gets wiped out with enough defaults. Calculating this probability requires knowledge of how the defaults are correlated and what's likely to happen to those correlations if the market suffers a downturn. That's something even the professionals struggle with. Tread carefully !
The historical default rate for CLO's is less than 1% so I don't see "wiped out" as a likely outcome for the AAA or BBB tranches. As you move down the tranches of course the risk increases, culminating in the equity tranche which only gets paid after all the other tranches. I agree that caution is warranted but I think this investment class is worthy of consideration for income investors. If you're aware of an asset class with less volatility, higher yield, and less default risk....I'm all ears!
Ah yes, the Cary Grant of Armchair investing is still out on safari and bringing meaty dividend stocks back to his hungry village. Thanks for your efforts.
Wow! I need to get a pair of high waist trousers and a dashing double breasted jacket to keep up that image :)
@armchairincomechannel But only if it's in the Armchair Income budget. Then again, keep the golf shirt and casual wear. A double-breasted jacket and high-waisted trousers might alienate the meat-and-potatoes fixed-income crowd.
Fund is only a year old.
Yes, it's young. That's one of the reasons I'll start with a small allocation. JAAA and JBBB have a longer history. I'm also cautious about the recent change of management.
Don't let any service access your brokerage account, are you insane
I don't. I like to enter my trades manually. Helps me keep a mental track of what I'm doing and like you, I don't like to give my brokerage info out.
CLOs sound a bit like BDCs
Both are in the floating rate loan world. BDC's underwrite, issue and manage their own loans individually and may take an equity position. CLO funds buy bundles of hundreds of loans that were created by others. Also CLO's are more specific about the credit ratings. Basically, BDC's are lenders and CLO's are investors in loans.
Bundled loans - isn't that what led to the great real estate crash of 2008? (Too many bad loans snuck into the bundles)
Sort of...the bundled mortgage loans led to the 2008 crash, specifically...Mortgage Backed Securities (MBS'). These loans are business loans...nothing to do with mortgages. Default rates for CLO's during the 2008 crash were very low.
like iclo better
ICLO competes with JAAA or CLOX. I haven't done a deep dive on that one.
CLOs and CDOs are EXACTLY the same thing... you do call out that the underlying debt instruments are different (mortgage loans vs business loans).
Prove it
As I explained in the video, CDO's include mortgages, whereas CLO's hold business loans and not mortgages. They're not the same thing. If you'd like a more detailed breakdown of all the differences, see this article: www.vaneck.com/us/en/blogs/income-investing/clos-vs-cdos-understanding-the-difference/#:~:text=As%20a%20generic%20term%2C%20CDO,that%20invest%20in%20leveraged%20loans.
@@danstevens64 A loan is a type of debt. Just as Mr Armchaired explained, these are bundled loans which are sold in "tranches" with varying degrees of credit risk/ratings. The only difference is that CLO are bundled business loans... and CDOs are bundled mortgages. It would not surprise me depending on who you are speaking with, they may use it interchangeably. An analogy maybe what's the difference between a taxi driver and an Uber driver? They are different, but essentially the same.
9% is treading water against inflation, u need better ROI to outpace inflation
You're welcome to share the income investment strategy that comfortably exceeds 9%/year. BTC delivers higher returns but during crypto winter it doesn't pay the bills. If you can sell enough at the top to last the winter then it could work.
I love yield rates of 8% or more.
This makes me laugh when i see 5% on CD rates given by local banks. and wonder how many people are getting screwed.
The big difference here is risk. Your bank CD is practically zero risk. The yield is guaranteed by the bank. Your balance will never go down, and even if the bank fails, the money is usually insured by the government (FDIC in the case of US banks, up to $250k)
These high-yield funds carry risk. Your balance can go down. The yields are not guaranteed.
Bank customers are not getting screwed. They are just taking less risk for lower returns.
@@hirsch222 Explained very well. It's shocking how people think there's a free lunch, just laying around.
Apples and oranges. Banks guarantee your capital and are backed by the FDIC. CLO's offer higher rates because they come with higher risk.