Key takeaways:

• CLOs delivered steady results in Q3, supported by solid fundamentals and continued investor interest.
• Higher-quality tranches remain a focus, given their balanced risk and return profile.
• Market conditions appear supportive, though some near-term volatility is possible.

CLOs carried their momentum into the third quarter, delivering positive returns across the capital stack and extending their streak of monthly gains, driven by strong fundamental and technical factors. During the quarter, CLOI slightly outperformed its benchmark by 8bps (1.59% vs 1.51%) and was approximately in line on a year-to-date (YTD) basis (4.39% vs 4.36%). The VanEck AA-BB CLO ETF (CLOB) outperformed its benchmark in the quarter, the J.P. Morgan CLOIE Balanced Mezzanine Index, by 3bps (2.21% vs 2.18%), and has slightly underperformed YTD by 13bps.

Although corporate balance sheets remain strong overall, we prefer tranches higher in the capital stack given weakness in the U.S. labor market and ongoing trade tensions. Increased dispersion lower in the capital stack is a theme that has continued to play out following recent auto sector defaults. Manager, vintage and portfolio selection remain key and could present attractive opportunities for select purchases of lower rated paper. Despite tight valuations we believe risk is balanced overall, but expect additional bouts of volatility over the coming months and continue to maintain the ability to shift into lower rated tranches during future periods of market weakness.

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 0.40% and the total expense ratio is 0.40%. 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, 2025. “Other Expenses” have been restated to reflect current fees.

CLOB 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.

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, 2026. “Other Expenses” have been restated to reflect current fees.

Market Update

CLOs generated positive returns across the capital stack in September and total returns were positive for the asset class for the 30th consecutive month. Positive sentiment was helped by the Federal Reserve, which cut interest rates by a quarter-point as a precautionary measure. This was done even as the economy was growing faster than expected, thanks to strong consumer spending. Investor demand remained steady, with CLO ETFs reporting $1.7bn inflows. CLO ETFs have seen 20 consecutive weeks of inflows and total CLO ETF AUM surpassed $34bn. US Treasury rates were mixed with 5-year yields backing up 5 basis points (bp) to end the month at 3.74% while 10-year yields rallied 8bp to end the month at 4.15%.

Floating rate CLOs and bank loans underperformed high yield bonds and investment grade credit, as duration benefited from lower treasury yields.

Source: JP Morgan and ICE Data Indices as of 9/30/2025. 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 decreased for the second consecutive month following the strongest issuance of the year in July, with $11.0bn pricing in September, compared to $18.8bn in August. Refinancing and reset activity declined, but remained strong overall, with $35.9bn pricing, after $39.2bn in August. Total issuance of $415.2bn is the largest volume to start a year on record, bolstered by a record -setting quarterly new issuance of Middle Market CLOs.

Loan market technicals posted a rare net-supply surplus in September, albeit a modest one. Net loan supply picked up in part as repayment activity slowed during the month and as transactions launched in prior months closed and were added to the Index. Primary market activity during the month remained skewed toward opportunistic transactions as issuers continued to take advantage of borrower-friendly capital markets to reprice their debt. Net outflows from retail loan funds picked up in September, increasing to $879mn from net outflows totaling $376mn in August.

In September we saw the largest payment default since April 2023, but also no distressed exchanges for the first time since July 2022. The trailing twelve-month default rate within the Morningstar US Leveraged Loan Index increased 31bp to 1.47%. As measured by JP Morgan, the default rate including distressed exchanges, increased 17bp to 3.49%. 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. We anticipate the default rate to remain below historical averages in the near-term for the leveraged loan market as a result. None-the-less, our expectations are that defaults, including distressed exchanges, will remain above the long-term historical average of ~3%, with the path for the default rate uncertain given rapidly changing trade policy and the result of the high probability of distressed exchange transactions, ultimately, failing.

US CLO secondary market spreads tightened across most of the capital stack in the quarter. The AAA tranche tightened 5bp; AA’s, 2bp; single-A’s, were flat; BBB’s, 21bp; BB’s, 35bp and single-B’s, 33bp. Meanwhile, the Morningstar LSTA Leveraged Loan Index widened 4bp and the Bloomberg US HY Index tightened 5bp.

Portfolio Strategy

The borrowing rate for leveraged loan companies remains high following rate increases from central banks in 2022 and 2023. However, borrowing rates are set to move lower following the reinitiation of rate cuts from the Fed in September despite inflation remaining above the Fed’s target, a low unemployment rate, albeit into a weakening labor market, and faster economic growth than anticipated. The market now expects two more rate cuts before year-end. While the Fed has signaled a more dovish stance during comments made by Fed Chairman Powell at Jackson hole, the Fed remains in a very tricky position as US trade policy changes rapidly, inflation remains above target, and hard economic data post the imposition of tariffs has yet to come through. However, the government shutdown delayed key releases, leaving recent labor market softness lingering and likely reinforcing the Fed’s dovish stance in October. Cuts will ultimately provide relief for more stressed borrowers.

The market has stabilized since the tariff escalation and de-escalation back and forth in April, with spreads tightening materially off the wides and prices rallying back to levels seen in mid-March, when most of the loan and CLO tranche markets were pricing above par. However, given signs of economic weakening in the US, particularly in the labor market, and the continued prospects of a global trade war including recent inflamed tensions with China, we prefer tranche purchases higher in the capital stack, with selective purchases of shorter spread-duration assets for lower rated credits. We believe current AAA spreads are tight, so given our up in quality bias, we believe adding AA and A rated securities make the most sense. However, recent demand dynamics have decreased the basis between higher and lower rated investment grade tranches. 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, buying in the secondary market has become less attractive, 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 9/30/2025. 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 9/30/2025. 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

While GDP, income, and consumption have slowed this year, they remain pretty resilient nonetheless. Job growth, on the other hand, has slowed more significantly. The Fed’s mandate encompasses employment and inflation, not growth and inflation – so it’s no surprise that the FOMC cut the policy rate 25 basis points without pushback to market expectations for more cuts. We expect rate cuts to continue until employment shows green shoots, which could take a while, with a lack of hiring thinning out after a long period of post-Covid labor hoarding. More tariff pass-throughs likely remain ahead, despite the impact to date being less than expected. While we believe the slowdown and inflation risks will not be behind us for a few more months, their threat is nonetheless receding, and an upcoming cyclical reacceleration and secular growth in 2026 are drawing nearer. From a fundamental standpoint, 2Q25 earnings season was generally positive. While leverage levels continue to increase modestly, corporate balance sheets remain in good shape versus historic averages.

While CLO spreads remain on the tight end of historical averages, there is a case to be made that tight valuations are warranted in the face of an accommodative fundamental back-drop of low, but positive, growth combined with tailwinds from both monetary stimulus and upcoming positive impact from stimulative fiscal policy actions through tax cuts. The technical backdrop is also poised to remain supportive. Loan repricings have put pressure on equity arbitrage, making it more challenging to bring new deals to market. Tighter liability spreads are helping offset lower asset coupons, but not entirely. CLO demand is also expected to remain strong given ongoing inflows to CLO ETFs, and with the Federal Reserve cutting rates and the Bank of Japan gradually pursuing a tightening monetary policy, demand for CLOs from yen-based investors may strengthen as hedging costs decline. Redemptions also continued to constrain net supply, with $20bn of redemption volume in 3Q, the highest quarterly volume of redemptions in history. With the percentage of the CLO market post reinvestment period down to only 14%, we should see fewer CLO redemptions in the coming quarters.

While the team does not expect significant spread compression from here, it believes returns will be driven by carry going forward. We think CLOs have attractive total return potential relative to other equivalently rated fixed income assets under these conditions. That said, roller coaster trade dynamics and other currents will keep markets fluid, and we expect to see both positive shocks, in the form of deal announcements or teases, and negative ones, such as more aggressive policies or deal disappointments. Despite likely headline-driven volatility in the coming months, we believe the risk is balanced. None-the-less, tight valuations tilt incrementally toward a more defensive portfolio bias.

The Fed resumed cutting rates in September and appears poised to continue cutting over the next several meetings. However, over the next twelve months we believe they will take a more measured approach than the market is pricing, and interest rates will stay higher than the market currently expects. In a world where interest rates will be higher for longer, floating rate assets continue to be attractive. Across many portfolios, we repositioned higher in the capital stack as spreads tightened off the lows and are awaiting opportunities to rotate down from AAA/AA tranches to A/BBB, and opportunistically BB-rated tranches where allowed, during future bouts of volatility. We continue to see spreads and yields attractive under most market scenarios over the next twelve months. That said, we believe having a nimble approach is of paramount importance given the pace of news flow which is rapidly shifting consumer and business sentiment. In addition, a robust bottoms-up approach to security selection remains key given the significant tail risks to the fundamental backdrop and a market bifurcated between vintages and, relatedly, between deals in and out of their reinvestment periods. Given the dispersion seen in the loan market, certain CLO portfolios holding weaker credits may eventually experience impairments to the lowest rated debt tranches, something we have begun to see play out following the recent and fast-moving bankruptcy filing of a supplier of aftermarket automotive parts. As a result, vintage, portfolio, and manager selection remains key.

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