Key takeaways:

• Higher-rated tranches remain favored given uncertain policy environment.
• Increased dispersion in lower rated tranches could create select opportunities.
• Despite near-term volatility risks, CLOs have strong potential to maintain carry into 2026.

CLOs sustained their positive momentum into the fourth quarter, delivering positive returns across the capital stack despite a more volatile macro backdrop and shifting investor sentiment towards the end of the year. During the quarter, CLOI (30-day SEC yield: 5.24%) slightly outperformed its benchmark, the J.P. Morgan CLO IG Index, by 3bps (1.31% vs 1.28%) and outperformed on a year-to-date (YTD) basis by 6pbs (5.76% vs 5.70%). The VanEck AA-BB CLO ETF (CLOB) (30-day SEC yield: 6.18%) underperformed its benchmark, the J.P. Morgan CLOIE Balanced Mezzanine Index, in the quarter by 4bps (1.30% vs 1.34%) and by 16bps in 2025 (6.94% vs 7.10%). CLOs continued to compare favorably to many traditional fixed income sectors, reinforcing their role as a compelling source of income and relative value as investors look ahead to a more uncertain, but still supportive, policy environment entering 2026. Our preference for higher rated tranches remains, given tight valuations in the presence of underlying risks, but increased dispersion in lower rated tranches could create select opportunities. With volatility expected in coming months, the portfolio is positioned to shift into lower rated tranches when value emerges.

CLOI Average Annual Total Returns^* (%)

^*Returns less than one year are not annualized.
Effective May 1, 2025, the J.P. Morgan CLO IG Index replaced the J.P. Collateralized Loan Obligation Index as the Fund's benchmark

The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.

CLOI’s gross expense ratio is 0.36% and the total expense ratio is 0.36%. Van Eck Associates Corporation (the “Adviser”) will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Notwithstanding the foregoing, the Adviser has agreed to pay the offering costs until at least May 1, 2027. “Other Expenses” have been restated to reflect current fees.

CLOB Average Annual Total Returns^* (%)

^*Returns less than one year are not annualized.

The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.

CLOB’s gross expense ratio is 0.45% and the total expense ratio is 0.45%. Van Eck Associates Corporation (the “Adviser”) will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and[CD4.1] extraordinary expenses. Notwithstanding the foregoing, the Adviser has agreed to pay the offering costs until at least May 1, 2026. “Other Expenses” have been restated to reflect current fees.

Market Update

In December, CLOs generated positive returns across the capital stack. During the month, investors navigated a “hawkish cut” from the Federal Reserve, resilient economic data and active capital markets. November payrolls were relatively distortion-free, increasing by 64k and saw an acceleration in private payrolls. The unemployment rate, however, increased to 4.6%, reflecting an uptick in temporary layoffs. The November CPI report came in lower than expected at 2.7% versus economist forecasts of 3.1%. However, the report was materially distorted by the shelter component. The Fed cut the federal funds rate by 25 bps for the third consecutive meeting, bringing the target range between 3.5%-3.75%. However, comments from FOMC speakers indicate that the Fed has shifted back to a data dependent stance amid a rising unemployment rate while hiring demand is stable and business surveys point to solid growth. Retail demand softened during the month with CLO ETFs reporting $88mn of outflows in December. 5- and 10-year Treasury rates traded 13 bps and 15 bps higher, respectively.

Overall, CLOs outperformed investment grade credit, but underperformed high yield bonds and bank loans during the quarter. Lower rated CLO tranches, BB-Bs CLOs in particular, outperformed in 2025, followed by high yield corporates.

Source: JP Morgan and ICE Data Indices as of 12/31/2025. CLOs represented by J.P. Morgan Collateralized Loan Obligation Index, CLOs IG represented by J.P. Morgan Collateralized Loan Obligation IG Index, CLOs Mezz represented by J.P. Morgan Collateralized Loan Obligation Balanced Mezzanine Index, AAA Rated CLOs represented by J.P. Morgan CLO AAA Index, AA Rated CLOs represented by J.P. Morgan CLO AA Index, A Rated CLOs represented by J.P. Morgan CLO A Index, BBB Rated CLOs represented by J.P. Morgan CLO BBB Index, BB Rated CLOs represented by J.P. Morgan CLO BB Index, B Rated CLOs represented by J.P. Morgan CLO B Index, US Agg is represented by the ICE BofA US Broad Market, Investment Grade Corporates represented by ICE BofA US Corporate Index, High Yield Bonds represented by ICE BofA US High Yield Index, and Leveraged Loans represented by JP Morgan Leveraged Loan Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

CLO new issue supply declined during the month, with the market slowing during the holiday season over the back half of the month. New issue supply totaled $12.7bn in December, compared to $21.1bn in November. Total 2025 new issuance of $201bn set an annual record for the second straight year. Refinancing and reset activity also decreased and was the lowest volume since May, with $17.2bn pricing, after $21.1bn in November. Total annual refinancing/reset activity of $341bn was also an annual record.

Loan market technicals reverted to a net-supply shortage in December as a pickup in repayments offset slower growth in demand for loans. Loan repayments increased to $24.6bn in December, up from $13.2bn in November, because of several corporate M&A transactions. Loan issuance increased in December versus the prior month as loan prices stabilized although volumes were capped by seasonal trends with activity limited during the holiday period. Despite the slower pace heading into year-end, 2025 primary market activity reached the second highest level on record, only falling short of the record set in 2024, and posted the third straight year of new-money deal growth. Net retail outflows increased to $1.1bn in December, from $0.8bn in November, as the Fed continued to cut rates with additional rate cuts forecasted in 2026.

The trailing twelve-month default rate within the Morningstar US Leveraged Loan Index decreased 2bp to 1.23%. As measured by JP Morgan, the default rate including distressed exchanges, decreased 45bp to 2.87%. Activity has been elevated as borrowers with unsustainable capital structures endeavored to manage their liabilities and avoid the bankruptcy process through liability management exercises, keeping the “official” default rate lower than otherwise. However, the default rate is now 165bp below the 4.5 year high set in January.

US CLO secondary market spreads were widened in the fourth quarter. The AAA tranche widened 5bps, AAs were flat; As widened by 5bps; BBBs by 11bps; BBs by 41bps; and single-Bs tightened by 25bps. Meanwhile, the JP Morgan Leveraged Loan Index widened by 47bps and the ICE BofA US High Yield Index widened 1bp.

Portfolio Strategy

The borrowing rate for leveraged loan companies remains high following rate increases from central banks in 2022 and 2023. However, borrowing rates moved lower following rate cuts from the Fed at their last three meetings. Cuts were driven by increasing concern over the downside risk to employment, despite inflation remaining above the Fed’s target and faster economic growth than anticipated. The language from the Fed coming out of the December meeting was more hawkish around the extent and timing of further cuts. The market now expects two rate cuts during the back half of 2026. The Fed is in a tricky position as inflation remains above target and labor market weakness lingers. Renewed pressure from the Trump Administration in the form of a criminal probe into Fed Chairman Powell has again increased fears about the Fed’s independence and thrown the longer-term policy path into question. Any additional cuts will ultimately provide relief for more stressed borrowers.

Valuations still appear expensive amid signs of U.S. economic weakening, particularly in the labor market, as well as continued global trade war risks and rising geopolitical tensions related to Venezuela and Iran. As a result, we prefer higher-tranche purchases in the capital stack, with selective exposure to shorter spread-duration assets for lower-rated credits. Despite feeling that IG spreads are tight, we are finding value in AAA, AA, and A rated securities. Despite our preference for higher rated paper, we have also seen increased dispersion between managers lower in the capital stack, which could present attractive opportunities for select purchases of lower rated paper. We also expect there to be additional bouts of volatility in the coming months and would like to maintain the ability to shift further into lower rated tranches during future periods of market weakness. Given the rally since April 2025, buying in the secondary market has become less attractive, in general, and we prefer purchases in the primary market, even when taking an increase in spread duration into account.

CLOI Total Return and Credit Allocation

Source: Factset, JP Morgan, VanEck as of 12/31/2025. AAA Rated CLOs represented by J.P. Morgan CLO AAA Index, AA Rated CLOs represented by J.P. Morgan CLO AA Index, A Rated CLOs represented by J.P. Morgan CLO A Index, BBB Rated CLOs represented by J.P. Morgan CLO BBB Index, BB Rated CLOs represented by J.P. Morgan CLO BB Index, Index performance is not representative of Fund performance. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

CLOB Total Return and Credit Allocation

Source: Factset, JP Morgan, VanEck as of 12/31/2025. AA Rated CLOs represented by J.P. Morgan CLO AA Index, A Rated CLOs represented by J.P. Morgan CLO A Index, BBB Rated CLOs represented by J.P. Morgan CLO BBB Index, BB Rated CLOs represented by J.P. Morgan CLO BB Index, B Rated CLOs represented by J.P. Morgan CLO B Index. Index performance is not representative of Fund performance. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

Outlook

Despite concerns that credit issues are looming following the recent isolated, but high-profile, bankruptcies, our more cautiously optimistic view is that credit markets and their infrastructure remain solid and in our view will be buoyed by improving economic conditions in 2026, driven by supportive fiscal and monetary policy, US tax cuts and deregulation, and, critically, ongoing AI expansion – a key area to watch. Fixed income markets tend to thrive in periods of low and steady growth, without extremes – conditions that align with our supportive central case scenario for 2026. While we will be keeping an eye to structural shifts and emerging risks in credit markets – particularly the impact of AI-related issuance and stress in lower-income segments – we think investors need not be alarmed by idiosyncratic credit issues, or fear that they portend a credit cycle explosion. We view such an outcome as highly unlikely barring a major economic downturn (which we likewise don’t expect).

While current tight valuations can limit upside potential in fixed income in 2026, we believe CLOs remain an attractive asset class. We believe CLOs offer attractive opportunities to maintain carry in fixed income portfolios relative to other equivalently rated fixed income assets amid current conditions. Institutional demand for CLOs remains robust, and CLO ETFs saw more than 20 consecutive weeks of inflows through mid-October before experiencing some reversals heading into year-end. Recent geopolitical developments in Venezuela and Iran and renewed attacks on Fed independence did not trigger a significant immediate market reaction, but they highlight the presence of underlying risks that can quickly translate into market volatility. Despite likely headline-driven volatility in the coming months, we believe risks are balanced, though tight valuations tilt us toward an incrementally more defensive bias. We believe a nimble and robust bottom-up approach to security selection is paramount given the dispersion in the loan market, in which certain CLO portfolios holding weaker credits may eventually experience impairments to the lowest-rated debt tranches – which could result in attractive opportunities to move down the capital stack.

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