Miguel Ramos Fuentenebro, co-founder of Fair Oaks Capital, an investment firm with $3bn in assets under management, explained that the Fair Oaks AAA CLO fund launched in 2019 and now has a net asset value of “nearly” €150m. The fund contains only the AAA tranches from 54 collateralised loan obligations backed by large syndicated loans.
“The reason is that [the companies behind the loans] are much easier to analyse.” Ramos Fuentenebro commented during an interview on 14 February that companies underlining that these transactions provide regular information. Besides, the loans trade on the secondary markets. He noted that the CLOs in the fund have an underlying portfolio that are “lightly managed.”
Given a better relative value in Europe than in the US, the fund has only invested in European CLOs, but “that may change” as it can also invest in US AAA tranches.
Why set up an ETF share class?
Having observed the success and rapid growth of CLO ETFs in the US, Fair Oaks told Paperjam that it recognised the need by European investors to secure highly-rated floating-rate CLO instruments in “a highly liquid and easily tradable format.” Consequently, the firm decided that gets the “full benefits” of the underlying portfolio.
According to data firm Pitchbook, the Fair Oaks AAA CLO ETF is the first European CLO ETF. It has been followed by the launch in January 2024 of the Janus Henderson Tabula European AAA CLO UCITS ETF, which is an ETF share class of the Janus Henderson Tabula Fund, also domiciled in Luxembourg. The data provider expects a “few more CLO ETFs” to come.
Both [countries] are having very robust regulatory regimes. Trying to go to a friendlier jurisdiction… is counterproductive
In a written statement, Janus Henderson declined to comment whether it would have launched the ETF in Ireland if the underlying assets would have been US equities due to the double tax treaty agreement between Ireland and the US, which taxes dividends at a rate of just 15%. However, the asset manager remarked that it has vehicles in both jurisdictions and “will decide on a case-by-case basis taking into consideration a number of factors including regulatory guidelines and economic differences in running collective investments.”
Why domicile an AAA CLO ETF in Luxembourg?
As the portfolio was ramped, an existing fund with a track record and an infrastructure already in place, “we did not need to start the ETF from zero” in another country such as Ireland, said Ramos Fuentenebro. He explained that Fair Oaks took advantage of its long-standing dialogue with the Financial Sector Supervisory Commission (CSSF) on the nature of the product, which should continue to focus on AAA tranches.
“Both [countries] are having very robust regulatory regimes. Trying to go to a friendlier jurisdiction… is counterproductive,” said Ramos Fuentenebro. He thinks that investors in the fund/ETF are specifically focused on its risk management ability, and the diligent monitoring of the regulator.
Abolishment of Luxembourg subscription tax
Starting from 1 January 2025, Luxembourg ceased to apply the for all ETFs. “That differentiating factor has disappeared. Investors and managers will probably be as attracted to Luxembourg as to Ireland,” stated Ramos Fuentenebro. He thinks that was the “main reason” why Ireland was more popular destination for active ETFs.
“Given the size of the fund, we could liquidate in a day”
CLOs have had a history of illiquidity at the best of times. Despite their track record, their complexity has made them very illiquid to sell and suffered massive price discounts during the global financial crisis. Many institutional investors disregarded them for many years afterwards.
Yet things may have changed. Ramos Fuentenebro argued that the CLO market is $1.5trn large nowadays. Most of that market is in triple A-rated tranches. Besides, he estimates that the trading volume is “probably something between $6bn and $10bn a month.”
Since before the last global financial crisis, he argued that “nothing much has changed in terms of structure.” A factor that may support liquidity is the strong fundamental track record. He claimed that “there’s never been a default in a triple A CLO.”
Liquidity mechanism remains to be tested in a crisis
According to a research note published by Pitchbook in February 2025, the primary market is where new ETFs are created and where existing ETFs are redeemed for large orders rather than on the secondary market, ETF fund managers like Janus Henderson and Fair Oaks are not involved with the secondary market and are only prompted to act by the authorised participants, or APs.
Pitchbook explained that the investor liquidity is provided in the secondary market by market-makers who set two-way prices electronically rather than through two-way order flows. Like a proprietary trading desk, neither market-makers nor APs are “trading” in the sense that they would take a long or short position. Instead, they construct or redeem whether they are long or short the ETF as a result of the sales and purchases from investors.
Listing an active ETF on CLOs on the LuxSE
Paperjam questioned whether the listing of an active ETFs on CLOs on the Luxembourg Stock Exchange in addition to the Xetra and the London Stock Exchange may dilute liquidity for a relatively small deal (ca€150m). “For an ETF, the cost of listing is not large.” Therefore, he thinks that using more venues make the product more accessible to investors. He admitted though that he felt that “you have to list in Luxembourg” as the fund is domiciled in the country.
Ramos Fuentenebro commented that RBC, an investment bank, may commit to make prices with several stock exchanges. “They literally will send the same prices. From their perspective, it doesn’t matter.” As described above, RBC, as an authorised participant, may want to settle its positions at the end of the day. If it is net long/short €3m of the ETF, it may ask the manager to create/redeem by the same amount.
Evolving investors base
The main players in the market have changed since the great financial crisis. He commented that the “main demand” for CLOs before the GFC was from the so-called and the , both highly leveraged financial structures with short term funding. Many went bust during the GFC.
Ramos Fuentenebro commented that nowadays, commercial banks such as JP Morgan, Wells Fargo, Bank of America, Commerzbank, Santander and Japanese banks, are investing into the AAA CLOs to manage their balance sheet. He reported a study from Citibank which said that “70% of the market is banks.” He claimed that the volatility of the AAA CLOs over the last five years has been closer to “the volatility of the 2-year German bond than any other corporate bonds.”
Can individual investors buy the active ETFs AAA CLO?
“No.” Yet he suggested that high-net-worth individuals buy the ETF through their private bank. “That ETF is for sophisticated investors.”