Key Takeaways

• CLOs returned 1.36% in Q3 while the U.S. Agg fell 3.43%, as floating rate coupons outpaced a bond sell-off driven by a rise in yields.
• Lower-rated tranches led the quarter, but with tail risks rising and AAA spreads near historical tights, we still prefer higher in the capital stack.
• Rising rates cut both ways: they keep demand for floating rate assets strong ($8.6bn of CLO ETF inflows in Q3) but raise the stakes for weaker borrowers, making credit selection a key differentiator.

CLOs: Rates Jumped in Q3, Supporting Floating Rate

CLOs posted positive returns in Q3 2026 as floating rate coupons provided attractive carry and outperformed other areas of fixed income which were impacted by a rise in bond yields. All tranches finished the quarter higher, led by lower rated tranches (Bs 6.64%, BBs 3.29%, against 1.18% for AAAs), but September brought renewed U.S. and Iran hostilities which renewed concerns around inflation. During the quarter, VanEck CLO ETF (CLOI) (30-day SEC yield as of September 30, 2026: 4.93%) was in line with its benchmark, the J.P. Morgan CLO IG Index (1.29% vs. 1.28%). The VanEck AA-BB CLO ETF (CLOB) (30-day SEC yield as of September 30, 2026: 5.76%) underperformed its benchmark, the J.P. Morgan CLOIE Balanced Mezzanine Index, by 67bps (1.35% vs. 2.02%). The VanEck CLO Opportunities Fund had its first distribution ($0.95/share) and returned 1.54% for the quarter.

Given rising tail risks in portfolios, we continue to prefer higher in the capital stack, finding value in AAA, junior AAA, junior A and selective equity tranches, with the primary market more attractive for debt and the secondary market more attractive for equity. With the market pricing three more hikes over the next year, higher for longer rates should keep demand for floating rate assets strong (CLO ETFs took in $8.6bn in Q3), while raising the stakes for weaker borrowers and for managers who underwrite them.

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.

CLOI’s gross expense ratio is 0.29% and the total expense ratio is 0.29%. 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.

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 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.

U.S. CLO Market Update

CLO debt tranches generated positive total returns in September, as the positive impact from carry more than offset modest price declines. The geopolitical backdrop worsened during the month as the U.S. and Iran resumed exchanging fire. By the middle of the month, markets were increasingly focused on the impact on energy markets, with Brent crude, at times, trading above $100/bbl. The increase in energy prices led to elevated concerns over sustained high inflation and increased the likelihood of stagflationary growth. A widely anticipated 25 basis point rate increase from the Federal Reserve and additional hawkish rhetoric from Fed officials drove Treasury rates sharply higher, with yields rising ~50 basis points across the curve during the month. Market odds of an additional Fed rate hike reached as high as 70% during the month before moderating by month end following a cooler than anticipated PCE reading. Demand for CLOs remained strong on the back of higher for longer rates, with CLO ETFs recording inflows of $3.4bn, the second largest monthly inflow on record. Total CLO ETF AUM ended the month just shy of $60bn.

CLO mezz outperformed other leveraged credit asset classes in Q3, while investment-grade CLOs tranches outperformed core bonds and U.S. corporates, reinforcing the structural case for the asset class.

Source: J.P. Morgan and ICE Data Indices as of 9/30/2026. 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, U.S. Agg is represented by the ICE BofA U.S. Broad Market, Investment Grade Corporates represented by ICE BofA U.S. Corporate Index, High Yield Bonds represented by ICE BofA U.S. High Yield Index, and Leveraged Loans represented by J.P. 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 volume totaled $46bn in the third quarter, a 43% increase from the second quarter but slightly below the quarterly average over the last three years. However, CLO new issue supply decreased month-over-month, totaling $14.8bn in September, compared to $17.8bn in August. Refinancing and reset activity increased during the month, with $25.6bn pricing, after $24.6bn in August. Year to date, new issue, refinancing, and reset volumes are -12%, +16%, and -24%, respectively, compared to the same period last year.

Technicals remained supportive within the loan market during most of September but softened toward month-end as higher net supply coincided with an acceleration in retail fund outflows. Primary market activity strengthened in September, driven by several sizable LBO and M&A transactions announced early in the month totaling $30.6bn. However, a number of these transactions had not closed or allocated by month-end. This compares with just $9.2bn of M&A-related issuance across July and August combined. Repricing and refinancing activity in the loan market held up despite a decline in the proportion of the market trading above par during the month. Loan retail funds experienced a net inflow of $820mn in September, an increase from net inflows totaling $730mn in August.

The trailing twelve-month default rate within the Morningstar U.S. Leveraged Loan Index decreased 32bp to 0.55%. As measured by J.P. Morgan, the default rate including distressed exchanges, decreased 31bp to 2.08%. Activity has been elevated as borrowers with unsustainable capital structures endeavor to manage their liabilities and avoid the bankruptcy process through liability management exercises, keeping the “official” default rate lower than otherwise.

CLO fundamentals were mostly weaker month-over-month but remain constructive overall. On the positive side, WARF decreased 12 points to 2679, Caa exposure decreased 0.1% to 3.8% and the minimum OC cushion increased 1bp to 446bp. Conversely, exposure to assets priced below 90 and 80 increased 0.1% each to 9.2% and 5.1%, respectively, CCC exposure increased 0.2% to 3.8% and equity NAV decreased 2.6% to 37.4%. Additionally, the WAS continues to be under pressure at 299bp given ongoing loan refinancing activity. The WAS is the tightest level in the history of post-crisis CLOs and 70bp lower than at the end of 2023.

U.S. CLO secondary spreads mostly widened in September and were mixed for the quarter. The AAA tranche widened 12bps in September but only 5bps in Q3; AA’s, 19bps and 8bps; A’s, 19bps and flat; BBB’s tightened, 1bp in September and 25bps in Q3; BB’s widened 6bps but tightened 5bps; and B’s, widened 23bps but tightened 46bps in Q3. Meanwhile, the ICE BofA U.S. HY Index widened 49bps in September but only 37bps in Q3. Most spreads widened over the last weeks of September driven by elevated rate volatility and the escalating conflict in the Middle East.

Portfolio Strategy

The borrowing rate for leveraged loan companies increased in September as the Fed began hiking rates. This was the first rate hike since 2023. Borrowing rates are poised to move even higher with the market pricing in another rate hike before the end of the year and a total of three more hikes over the next 12 months, which could prove problematic for weaker leveraged loan borrowers. This is a dramatic shift from year-end, when more than two cuts were priced in. On the positive side, Fed rate hikes could be supportive of floating rate debt and drive additional demand.

Despite modest spread widening in September, CLO valuations continue to appear expensive overall. Given increasing tail risks in portfolios, we continue to prefer tranche purchases higher in the capital stack. The ongoing threat of AI disintermediation continues to weigh on the software sector which has increased tail risks in portfolios since 1Q and underscores the need for rigorous fundamental credit analysis in CLOs, including stressing recoveries for distressed loans. Although we feel that IG spreads are tight, we find value in AAA, jr AAA, jr A and selective equity tranches. We also continue to see increased dispersion between managers lower in the capital stack, which could present attractive opportunities for select purchases of lower rated and equity tranches at some point. We 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. While we found more value in the secondary market following weakness at the end of the first quarter, the primary market is again more attractive for debt tranches while the secondary market is presenting more attractive entry points for equity tranches.

CLOI Total Return and Credit Allocation

Source: Factset, J.P. Morgan, VanEck as of September 30, 2026. 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, J.P. Morgan, VanEck as of September 30, 2026. 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.

VanEck CLO Opportunities Fund Characteristics and Allocation (as of 9/30/2026)

Distribution by Category

Source: VanEck as of September 30, 2026. Not intended as a recommendation to buy or sell any securities mentioned herein. Past performance is not indicative of future results.^* Weighted Average Portfolio Yield is a blend of debt yield to worst and equity IRRs, weighted by the market value of each holding as a percentage of the total portfolio.

Average Annual Total Returns* (%)

CLOIX’s gross expense ratio is 2.55% and the net expense ratio is 1.50%. Other expenses are estimated for the current fiscal year based on the Fund’s fees. The Adviser has agreed to waive the fees payable to it or to pay or absorb the Other Expenses of the Fund, including, without limitation, organization and offering expenses (excluding management fee payments; brokerage and transactional expenses; borrowing and other investment-related costs and fees including interest and commitment fees; short dividend expense; acquired fund fees; taxes; litigation and indemnification expenses; judgments; and extraordinary expenses not incurred in the ordinary course of the Fund’s business – collectively, the “Exclusions”), to the extent necessary to limit the Other Expenses of the Fund less the Exclusions to the annual rate of 0.50% of the Fund’s average daily net assets (the “Expense Limitation”). The Expense Limitation will continue until at least September 1, 2027. The Expense Limitation may be terminated by the Board upon thirty days’ written notice to the Adviser. The Expense Limitation may not be terminated by the Adviser without the consent of the Fund’s Board of Trustees. For a period not to exceed three years from the date on which a Waiver is made, the Adviser may recoup amounts waived or assumed pursuant to the Expense Limitation, provided it is able to effect such recoupment without causing the Fund’s Other Expenses (after recoupment) to exceed the lesser of (a) the expense limit in effect at the time of the waiver, or (b) the expense limit in effect at the time of recoupment. Additionally, the Adviser has agreed to partially waive its management fee in an amount equal to an annual rate of 0.50% based on the Fund’s average daily net assets through September 1, 2027. Separately, the Adviser has agreed to waive the fees payable to it by the Fund by any amount the Adviser or its affiliates collect as a management fee from investments in the investment companies managed by the Adviser or its affiliates.

Outlook

Following the first interest rate hike since 2023, the question has changed from whether the Fed will increase rates to how many hikes there will be, with the market pricing in three more hikes over the next year. Increased interest rates can have a mixed impact on CLO portfolios. On one hand, higher capital costs could renew concerns about marginal credits, particularly those facing near-term maturities. We have already seen early signs of this playing out, as some of the amend-and-extend transactions brought to market were later pulled when market conditions softened. This could add to the already increased tail risk in portfolios, creating even more dispersion among lower rated tranches, particularly BB and equity. Low MVOC deals and lower tier managers have seen material weakness relative to healthier portfolios and more established managers, a trend we expect to continue in the current rates environment.

On the other hand, a higher for longer interest rate environment should support demand for floating rate assets like CLOs. CLO ETFs saw inflows of $8.6bn in the third quarter as investors anticipated higher interest rates. In addition, CLO yields are starting from an elevated base, with the yield-to-worst for CLO AAAs ending the quarter at 5.5%. Higher short-term rates from additional rate increases would make CLOs even more attractive to income buyers. That said, the 10-year Treasury yield ended the quarter at 5.3%, coinciding with AAA spreads near historical tights, reducing the relative attractiveness of owning CLO AAAs over Treasuries. Five-year Japanese government bond yields at multi-decade highs are also adding to demand uncertainty.

Overall, while demand is expected to remain strong, we continue to observe increasing tail risks in portfolios, and therefore prefer tranche purchases higher in the capital stack. Given conservative portfolio positioning at the beginning of the year, we believe that we have been and continue to be well positioned to opportunistically add both in the primary and secondary markets across the cap stack. We believe the increased dispersion in the loan market makes a bottom-up approach and understanding the underlying credit risk in CLO portfolios essential to generate alpha as spreads widen.

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