Is JAAA’s Discount a Hidden Opportunity for Savvy Investors?
With JAAA trading at a persistent discount to NAV, is this an ideal time to buy, or is there more risk than meets the eye? | That's TradingNEWS
Understanding the Recent Discount and Investment Opportunities in the Janus Henderson AAA CLO ETF (NYSEARCA:JAAA)
The Janus Henderson AAA CLO ETF (NYSEARCA:JAAA) has recently been trading at a discount, raising questions among investors. While the broader market selloff and uncertainties surrounding AI and interest rates have caused this drop, the deeper reasons for JAAA’s underperformance warrant a closer look. JAAA has been flat in terms of total return over the last month, and its discount has deepened, presenting a unique investment opportunity for those willing to look beyond the surface.
Explaining JAAA’s Performance and Underlying Risks
The Janus Henderson AAA CLO ETF is a fund that invests predominantly in AAA-rated Collateralized Loan Obligations (CLOs). These CLOs are structured vehicles that bundle together corporate loans, offering a diversified portfolio of risky assets. The loans they invest in are typically floating rate debt issued by companies unable to secure fixed-rate loans. While the structure of the CLOs themselves is low-risk, the underlying loans are made to companies that, by definition, are riskier than those that can access fixed-rate debt. This introduces inherent risk, particularly in times of rising interest rates, as seen during 2022-2023.
Since the launch of JAAA, the ETF has performed solidly, delivering over 20% returns since 2021 with relatively low volatility, particularly after the rate hike periods of 2023. However, recent performance has shown signs of stagnation. JAAA’s current yield, driven by the floating nature of its investments, has outpaced T-bills, making it particularly attractive for income investors. But, the lack of growth since February 2025, coupled with a rising discount to NAV, has raised questions.
Why is JAAA Trading at a Persistent Discount?
One of the primary concerns is the persistent discount that has formed in JAAA’s share price. Typically, ETFs trade at or near their NAV (Net Asset Value) due to the internal market mechanisms that create and redeem shares. However, in JAAA's case, we’ve observed that despite increasing demand, the price has dropped below its NAV. This anomaly could be a result of several factors, with the primary reason being an imbalance between supply and demand. Despite the rise in assets, which indicates more demand, the discount continues to deepen.
What makes this particularly puzzling is that JAAA’s trading discount persists even as the fund has attracted additional investments. In the past month, the ETF saw an increase of $2 billion in assets, yet its discount to NAV remains.
What is Causing the Persistent Discount?
There could be a few reasons for this unusual behavior. One possibility is the issues with authorized participants, the entities responsible for managing the creation and redemption of shares. If there are inefficiencies in this process, it could lead to a persistent discount.
Alternatively, a deeper issue may stem from the fact that the broader market has shifted its perspective on CLO pricing. Investors in JAAA might be devaluing the CLOs in its portfolio compared to other AAA CLOs in the market. This change in sentiment could be because of the risk associated with the CLOs held by JAAA, which may have a higher proportion of junior AAA CLOs compared to other funds, like PAAA, which invests more heavily in senior AAA CLOs. The distinction between junior and senior CLOs is crucial as junior tranches tend to be more volatile and can experience more significant price fluctuations.
PGIM, a competing fund manager, has pointed out that junior AAA CLOs tend to behave more like lower-rated CLOs, and this could explain why JAAA’s discount has deepened. In periods of market uncertainty, these junior tranches may experience larger-than-expected drawdowns, leading investors to shy away from JAAA, especially given its higher exposure to these riskier tranches.
How Does JAAA Compare to Other CLO ETFs?
When comparing JAAA’s performance with other CLO ETFs, such as PAAA, it’s clear that the discount is unique to JAAA. Other AAA CLO ETFs have maintained their NAV and outperformed JAAA in recent months. This further points to the possibility that JAAA’s discount is tied to its portfolio’s composition rather than broader market factors alone.
JAAA’s exposure to junior AAA CLOs, as well as its strategy of targeting a higher yield, might explain why the fund has seen larger downside capture in comparison to other funds that focus on more senior CLO tranches. However, this higher yield is what attracts many investors looking for a slightly above-average income with relatively low risk.
JAAA's Yield and Risk Profile
JAAA is known for its attractive yield, which has been consistently higher than most bonds, largely due to the floating rate nature of its holdings. While its yield has recently been impacted by Fed rate cuts, it remains a strong option for investors seeking income with low volatility. As of now, the SEC yield of JAAA is approximately 5.6%, which is still an attractive figure, especially considering its extremely low risk compared to other bond sub-asset classes.
Given that JAAA invests in AAA-rated CLOs, which have never experienced a default, its credit risk is minimal. The primary risk lies in the volatility of the CLOs’ underlying loans, especially those in the junior tranches, which can see larger fluctuations during times of market stress.
Future Outlook and the Case for JAAA
Despite the recent performance dip, JAAA remains a solid option for income-focused investors. The fund’s risk-adjusted returns are impressive, and its position as a major player in the CLO space, particularly with its AAA-rated holdings, makes it a low-risk investment for those seeking stable returns. Additionally, with a strong dividend yield and a track record of outperforming most bonds, JAAA presents a compelling case for investors looking for safety combined with above-average yield.
However, the recent discount to NAV and the potential mispricing of its portfolio’s CLO tranches should be closely monitored. The diversification across asset managers within the CLO space could mitigate risks associated with the discount and provide more stability in the long term.
Conclusion: A Strong Buy or Caution Required?
Despite the concerns regarding the discount to NAV and the potential exposure to junior AAA CLOs, JAAA continues to be a strong investment for those looking for stable, income-generating opportunities. Its AAA-rated CLOs offer very low volatility and minimal default risk, making it an attractive option in today’s low-yield environment. For those who can tolerate the slight risk of a devaluation in its portfolio, JAAA remains a good long-term hold, especially as the market continues to stabilize.
Should investors buy into JAAA’s current dip, or is the discount a sign of deeper issues that need to be addressed? The answer lies in understanding the fund’s portfolio composition and its performance relative to other CLO ETFs. While there are risks, the fundamentals of JAAA make it a solid option for conservative investors seeking above-average yield with low risk.
