The Hidden Yield Hunters: Three ETFs Redefining Income in 2024

Why These Three ETFs Matter Now

After spending countless hours analyzing the ETF landscape, I've identified three funds that have caught my attention for their exceptional combination of yield and performance. What makes these particularly interesting is how they've managed to generate substantial returns in a market environment that's been notably challenging for income investors.

Please note that I do not have a current investment in ANY of these funds at the moment - but I am likely to enter positions in early 2025.

Let's put some numbers together, upfront, right away:

• CLOZ is delivering an 8.8% yield while maintaining surprisingly low volatility

• PBDC is pushing a 9.4% yield through smart BDC selection

• CEFS, while offering a slightly lower 7.7% yield, has consistently outperformed 95% of its peer group

What really excites me about these funds is how each has carved out its own unique niche in the market. They're not your typical "buy-the-index-and-hope" ETFs – these are sophisticated strategies that have proven themselves in real market conditions.

The Quick Snapshot

Before we dive deep, here's what you need to know:

1. CLOZ (The CLO Specialist)

   • BBB-BB rated CLO focus

   • Historically low default rates (0.53% - 2.32% over 10 years)

   • Variable rate structure that's worked brilliantly in this rate environment

2. PBDC (The Private Credit Play)

   • Access to business development company returns

   • Senior loan exposure with active management

   • Outperforming its benchmark since inception

3. CEFS (The Strategic Alpha Generator)

   • Active CEF portfolio management

   • Successful activist investment campaigns

   • Proven track record of generating alpha through multiple market cycles

In my analysis, these funds aren't just interesting for their yields – they're compelling because they've each found unique ways to generate returns in segments of the market that are often overlooked or misunderstood by mainstream investors.

CLOZ: The CLO Specialist - Navigating Structured Credit's Sweet Spot

Collateralized Loan Obligations (CLOs) remain one of the most misunderstood corners of the fixed income market. Often confused with their crisis-era cousins (CDOs), CLOs actually represent a sophisticated approach to corporate credit investing with a remarkable track record of resilience. CLOZ (Panagram BBB-B CLO ETF) provides targeted exposure to what many consider the optimal risk-reward segment of the CLO market.

The CLO Market Architecture

1. Structural Framework

   • CLOs are structured products backed by portfolios of leveraged loans

   • Built with multiple "tranches" of varying risk and return profiles

   • Employ strict structural protections and diversification requirements

   • Benefit from active management of the underlying loan portfolio

2. The CLO Capital Stack From safest to riskiest:

   • AAA Tranches (50-65% of structure)

   • AA Tranches (10-12%)

   • A Tranches (5-7%)

   • BBB Tranches (4-6%) ← CLOZ's primary focus

   • BB Tranches (2-4%) ← CLOZ's secondary focus

   • Equity (8-12%)

CLOZ's Strategic Edge

What sets CLOZ apart in the growing CLO ETF space:

1. Optimal Risk-Reward Targeting

   • Focuses on BBB-BB rated tranches which historically offer:

     • Higher yields than investment grade tranches

     • Better structural protection than equity

     • Remarkably low historical default rates (0.53% - 2.32% over 10 years)

     • Enhanced recovery rates versus traditional corporate bonds

2. Portfolio Construction Innovation

   • Active management approach focusing on:

     • Manager selection

     • Underlying collateral quality

     • Structural features

     • Relative value opportunities

3. Rate Protection Features

   • Built-in floating rate exposure

   • Minimal duration risk

   • Positive correlation with rising rates

   • Natural hedge against inflation

4. Market Timing Advantage

   • Entered market as CLO structures have matured

   • Benefits from post-2008 structural improvements

   • Positioned in less crowded part of CLO market

   • Takes advantage of growing institutional acceptance

Strategy Framework

• Primary Focus: BBB-rated CLOs

• Secondary Exposure: BB-rated CLOs

• Current Yield: 8.8%

• Risk Profile: Moderate, with low historical default rates

Performance Analysis

Notable aspects of CLOZ's performance include:

• Significant outperformance versus traditional bond indices

• Remarkably low volatility for its yield level

• Strong resilience during interest rate fluctuations

Risk Considerations

1. Credit Quality

   • Below investment grade exposure

   • Historical default rates: 0.53% - 2.32% (10-year cumulative)

   • Higher trading volatility than credit rating would suggest

2. Interest Rate Sensitivity

   • Variable rate structure minimizes duration risk

   • Potential yield compression in falling rate environment

   • Expected yield range: 7.0% - 8.0% after projected Fed rate cuts

PBDC: The BDC Navigator - A Deep Dive into Private Credit Markets

Understanding BDCs and PBDC's Unique Approach

Business Development Companies (BDCs) represent a fascinating corner of the financial markets that most investors overlook. Created by Congress in 1980, BDCs are essentially publicly-traded private equity firms focusing on providing capital to middle-market companies - businesses typically too small for traditional bank financing but too large for small business loans.

PBDC (Putnam BDC Income ETF) takes this already interesting investment vehicle and adds an active management layer that sets it apart from its passive counterpart, BIZD. Here's what makes it special:

The BDC Ecosystem

1. Market Role

   • BDCs fill a crucial gap in corporate finance, serving companies with annual revenues typically between $10 million and $1 billion

   • They act as regulated investment companies (RICs), requiring them to distribute 90% of their income to shareholders

   • Most BDCs focus on first-lien senior secured debt, providing both safety and attractive yields

2. Structural Advantages

   • BDCs can employ leverage up to 2:1 debt-to-equity

   • They offer exposure to private credit markets through a public vehicle

   • Built-in transparency requirements provide better visibility than traditional private credit funds

PBDC's Differentiated Strategy

What sets PBDC apart from BIZD and other BDC investments:

1. Active Security Selection

   • Unlike BIZD's market-cap weighted approach, PBDC's managers actively select BDCs based on:

     • Quality of loan portfolios

     • Management track record

     • Valuation metrics

     • Risk management practices

2. Portfolio Construction

   • Concentrated portfolio of ~20 BDCs versus BIZD's broader approach

   • Focus on BDCs with proven underwriting standards

   • Strategic positioning across different lending strategies

3. Risk Management

   • Active monitoring of credit quality

   • Ability to adjust positions based on market conditions

   • Dynamic allocation between different types of BDCs (e.g., sector focus, size focus)

Strategy Focus

The fund employs a multi-faceted approach targeting:

Portfolio Composition

• Investment Focus: 20 selected BDCs

• Current Yield: 9.4%

• Leverage: Inherent (through investing in the leveraged BDC structure)

• Active Management: Selective exposure to the strongest BDCs

Performance Metrics

Key performance characteristics:

• Outperformance vs. bond indices since inception

• Competitive returns versus S&P 500

• Superior returns compared to BDC index funds

Risk Framework

1. Market Risk

   • High volatility during market stress

   • Historical drawdowns >50% during severe market dislocations

   • Leverage amplification of underlying credit risk

2. Income Stability

   • Variable rate structure affects yield

   • Expected yield range post-rate cuts: 7.0% - 8.0%

   • Sector-specific risks in private credit markets

CEFS: The Strategic Alpha Seeker - Mastering the CEF Universe

Understanding the CEF Landscape and CEFS's Revolutionary Approach

Closed-end funds (CEFs) represent one of the market's most intriguing inefficiencies. Unlike their open-ended cousins, CEFs trade at prices that can significantly deviate from their underlying net asset value (NAV), creating opportunities for sophisticated investors. CEFS (Saba Closed-End Funds ETF) takes this inefficiency and turns it into an art form.

The CEF Market Dynamics

1. Structural Characteristics

   • Fixed capital structure that doesn't expand/contract with investor demand

   • Ability to trade at significant premiums or discounts to NAV

   • Typically employs leverage (usually 20-40%)

   • Must distribute substantially all income and capital gains

2. Market Inefficiencies

   • Retail-dominated ownership creates emotional trading patterns

   • Limited institutional involvement means less price efficiency

   • Discounts can persist for extended periods

   • Complex structures often lead to mispricing

CEFS's Multi-Dimensional Strategy

What makes CEFS particularly fascinating is its approach to exploiting these inefficiencies:

1. Activist Alpha Generation

   • Unlike passive CEF funds (such as PCEF), CEFS actively:

     • Targets funds trading at substantial discounts to NAV

     • Initiates campaigns to narrow these discounts

     • Engages with fund management to unlock value

     • Uses proxy contests when necessary

2. Tactical Portfolio Management

   • Dynamic allocation across:

     • Asset classes (equity, fixed income, alternatives)

     • Discount opportunities

     • Interest rate positioning

     • Market sectors

3. Strategic Positioning

   • Uses short positions (particularly in treasuries) to hedge risks

   • Employs leverage opportunistically

   • Takes concentrated positions when opportunities arise

   • Implements relative value trades between similar CEFs

4. Risk Management Innovation

   • Multi-layer approach combining:

     • Discount capture strategies

     • Interest rate hedging

     • Sector rotation

     • Leverage management

Strategy Architecture

Portfolio Dynamics

• Diverse CEF exposure across asset classes

• Current Yield: 7.7%

• Dynamic leverage management

• Tactical positioning across market cycles

Track Record Analysis

Impressive performance metrics:

• Consistent outperformance vs. CEF indices

• Strong risk-adjusted returns

• Successful activist campaigns driving value

Risk Architecture

1. Strategy Risk

   • Complex investment approach

   • Leverage impact on volatility

   • Dependency on management execution

2. Market Risk

   • High drawdown potential (40% during COVID)

   • Multiple layers of leverage exposure

   • Discount/premium volatility

Comparative Analysis of the 3 Funds

Market Environment Sensitivity

🎯 Quick Impact Guide:

💡 Key Takeaways:

• CLOZ: Most resilient to rate changes

• PBDC: Balance of opportunity and risk

• CEFS: Most complex rate relationship

Portfolios Fit - 3 Funds Only

Please note - I would not recommend these, but this is how you might consider a combination of these three funds. Most investors would benefit from a greater number of funds in their portfolio.

Risk Tolerance Alignment

Market Stress Scenarios and Expected Impact:

🔑 Key Observations:

• 📈 CLOZ shows most defensive characteristics

• 💰 PBDC maintains income even during stress

• 🎯 CEFS can capitalize on market dislocations

Conclusion

These three ETFs represent unique approaches to generating yield and returns in today's market. Each offers distinct advantages and risks:

• CLOZ provides stable, high-quality exposure to the CLO market with moderate risk

• PBDC offers access to private credit markets with strong current income

• CEFS delivers strategic alpha through active CEF management

The choice between them should be guided by individual investment objectives, risk tolerance, and portfolio construction needs.

Notes:

• This analysis is based on current market conditions and historical data. Future performance may vary significantly based on changing market conditions and economic factors.

• None of this is investment advice - just a personal evaluation of the ETFs in question and an analysis of how they would fit with my personal investing approach.