CAAA: A High-Yield CMBS ETF Navigating Rising Rates with Resilience

In a rising interest rate environment, income-focused investors face a paradox: higher rates typically depress bond prices but also elevate yields. The First Trust Commercial Mortgage Opportunities ETF (CAAA) offers a compelling solution for those seeking to balance yield attraction with dividend sustainability. By targeting non-agency commercial mortgage-backed securities (CMBS), CAAA leverages a unique strategy to generate income while mitigating risks inherent in a shifting rate landscape.

Yield Attraction: A Dual-Edged Sword

CAAA's current 30-Day SEC Yield of 3.85% and 12-Month Distribution Rate of 6.08% position it as a standout in the high-yield space. These metrics reflect a fund that not only delivers competitive returns but also maintains a consistent distribution pattern. The 6.08% distribution rate, calculated by annualizing the trailing 12-month ordinary distributions relative to net asset value (NAV), underscores CAAA's ability to generate income even as rates climb. This is achieved through its heavy allocation to non-agency CMBS (95.59%), which typically offer higher yields than agency-backed counterparts.

However, yield alone is not enough. Investors must scrutinize sustainability. CAAA's portfolio is weighted toward AAA-rated securities (94.42%), with a small portion in AA–-rated assets (1.17%). This high credit quality reduces the risk of defaults, a critical factor as CMBS delinquency rates rose to 7.03% in April 2025, driven by stress in multifamily and lodging sectors. By prioritizing investment-grade collateral, CAAA insulates itself from the most volatile segments of the CMBS market.

Dividend Sustainability: Liquidity and Duration Management

A key concern in rising rate environments is the ability of funds to maintain dividends. CAAA addresses this through a combination of liquidity buffers and duration control. The fund holds 3.84% in cash and cash equivalents, ensuring it can meet distribution obligations even during periods of market stress. Additionally, its weighted average effective duration of 3.80 years for long positions strikes a balance between sensitivity to rate hikes and capital preservation. This moderate duration means CAAA's portfolio is less volatile than longer-dated fixed-income assets, reducing the risk of NAV erosion that could force a dividend cut.

Derivatives also play a role in risk management. CAAA employs bond futures (27.24% of its composition) to hedge against rate fluctuations, though it avoids options on bond futures or interest rate futures. This approach allows the fund to adjust exposure without overcomplicating its strategy. The result is a portfolio that remains resilient even as the Fed tightens monetary policy.

Performance in a Rising Rate Environment

CAAA's performance metrics reinforce its appeal. Since inception in February 2024, the fund's NAV has delivered a 6.71% total return as of August 2025, outperforming the Bloomberg Non-Agency Investment Grade CMBS: US Aggregate Eligible Aaa Index, which returned 2.03% over the same period. This outperformance highlights the fund's active management and strategic positioning.

The fund's ability to generate consistent returns is further evidenced by its 3-year NAV return of 6.08% and market price return of 6.24%, figures that align closely with the broader non-agency CMBS market. This alignment suggests that CAAA's strategy is both effective and representative of its target asset class.

Risks and Mitigations

No investment is without risk. The rise in CMBS delinquencies, particularly in multifamily and lodging sectors, poses a challenge. However, CAAA's focus on AAA-rated collateral and its liquidity reserves provide a buffer. Additionally, the fund's moderate duration and use of derivatives help dampen the impact of rate hikes. Investors should also note that while the 12-month distribution rate is attractive, it is not guaranteed, as distributions may include returns of capital or realized gains.

Investment Advice: A Strategic Allocation

For income-focused investors, CAAA represents a strategic allocation in a rising rate environment. Its combination of high-yield CMBS, strong credit quality, and active risk management makes it a compelling alternative to traditional fixed-income assets. However, due to its exposure to commercial real estate, investors should consider CAAA as part of a diversified portfolio rather than a standalone holding.

In conclusion, CAAA's ability to navigate the dual pressures of rising rates and CMBS market volatility positions it as a robust high-yield vehicle. By prioritizing credit quality, liquidity, and moderate duration, the fund offers a sustainable income stream that aligns with the needs of investors seeking resilience in an uncertain macroeconomic landscape.