The world of fixed income investments accessible by average joes has continued to expand. And one of the hottest trends happens to be the growth of opportunistic and alternative credit. Leading that pack is the world of collateralized loan obligations (CLOs). Offering high yields and strong total returns, CLOs have long been gobbled up by institutional investors and high-net-worth families. And now the masses can enjoy access.
But just because we can doesn’t mean we should just rubber stamp the asset classes and go willy-nilly into funds offering exposure.
Not all CLOs are the same. To that end, investors need to do research and really choose the right fund to match their risk profiles. CLOs and their funds are still very attractive, but only if you buy the right ones.
A Quick Primer on CLOs
Many investors forget that bonds are loans. Whether you buy a bond issued by the Federal government or Apple, you’re essentially lending that entity money with the promise to pay you back plus interest.
Wall Street in its attempts to keep the money wheel going has taken the concept of bonds and applied its trade of securitization, which packages various loans/bonds together as one single security. This is where CLOs are born.
CLOs are essentially a ‘package’ of loans—typically 150 to 250—that are placed into a single security. In this case, most CLOs are senior secured loans made to corporate or private equity borrowers. But other debt, including fixed rate securities, can be part of the package. All in all, CLOs are a way for banks/lenders to remove their loans from their balances and into investors’ hands.
It should be noted that CLOs are not collateralized debt offerings (CDOs), which was one of the main reasons for the Global Credit Crisis and the Great Recession.
The key is that CLOs are divided up into what’s called ‘tranches.’ Each tranche comes with a different set of credit risks, rated AAA down to BB, with an equity tranche at the very bottom. The idea is that the various tranches represent their placement in the capital stack and how cash flow and losses are dealt with. So, when a loan payment is made, the cash flow first hits the top tranches and then trickles down. However, investors are potentially compensated for the additional risk of being at the bottom with higher yields.
And higher yields they have. Top-ranked CLOs are currently paying around 5.42%, while the bottom of the barrel has a current yield to worst of 11%.
A Wide Brush Stroke
With these high yields and rising investor interest, CLO ETFs have quickly become a top draw for many portfolios. According to a research report from Barclays, assets in CLO ETFs have grown by 10% in just the first few weeks of 2025. All in all, the 16 ETFs in the U.S. and Europe have acquired $2.6 billion in additional CLO securities, including a record $1.2 billion in net inflows the week of Jan. 17. Total cumulative AUM of CLO ETFs now sits over $25 billion. 1
However, the issue at hand may be just the wide brush stroke that many of these new CLO ETFs paint about the sector. Generally, these funds are characterized as AAA—owning the top tranches of CLO debt—or BBB, owning the bottom level.
The problem is these broad brush strokes don’t necessarily match up with ratings of their underlying assets. That’s because CLO ETFs are actively managed rather than track a broad index. Just because an ETF is labeled as AAA doesn’t mean it only holds AAA debt. Nuances and fund mandates can and do allow managers to move down the ladder as they see fit to boost yields and returns. But even among credit ranking, different tranches of senior and junior debt can have different market outcomes.
This table from PGIM highlights total returns and the volatility of those returns from 2020 through 2024 of various credit rankings. It’s important to note that junior AAA CLOs function very similarly to AA CLOs.
Source: PGIM
For the uninformed retail investor set, these broad brush strokes could be setting themselves up for failure. PGIM notes that even “small differences in the underlying credit quality of a CLO ETF can have a meaningful impact on the portfolio’s performance.” Investors may be drawn to the safety of a broad AAA CLO ETF—which has lower default rates than corporate bonds—only to have their fund contain lower-ranked debt. PGIM’s analysis shows that of the biggest AAA CLO ETFs, about 20% of their portfolios are in lower-ranked AAA debt or worse. 2
Times of market stress and volatility—like what we are experiencing today within the fixed income space, inflation, and rising bond yields—could produce losses and lower returns.
Attractive, But Caution Is Needed
CLOs are a good asset class and can generate some high income opportunities for portfolios. Moreover, this income is non-correlated with much of the broader bond market. All of that is great for portfolios. And even better these assets now come in low-priced ETFS. So CLOs are attractive.
But would-be investors in the space need to focus on what exactly the ETFs own and decide if that’s what you are comfortable with. While doing credit analysis on the hundreds of CLOs in each fund is overkill or out of the reach of the average joe or their advisor, understanding the types of debt owned by each fund before you make a buy decision is critical.
Another option could be to buy more than one, hedging your bets among managers and credit types.
CLO ETFs
These ETFs were selected based on their ability to provide exposure to the CLO market. They are sorted by their one-year total return, which ranges from 6.9% to 10.2%. They have expense ratios between 0.19% and 0.50% and assets under management of $240M to $16B. They are currently yielding between 5.2% and 8.1%.
| Ticker | Name | AUM | 1-year Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JBBB | Janus Henderson B-BBB CLO ETF | $1.35B | 10.2% | 8.1% | 0.50% | ETF | Yes |
| CLOI | VanEck CLO ETF | $749M | 8.1% | 6.3% | 0.40% | ETF | Yes |
| JAAA | Janus Henderson AAA CLO ETF | $15.6B | 7.3% | 6% | 0.22% | ETF | Yes |
| PAAA | PGIM AAA CLO ETF | $1.39B | 7.3% | 5.2% | 0.19% | ETF | Yes |
| CLOA | iShares AAA CLO Active ETF | $244M | 6.9% | 5.7% | 0.20% | ETF | Yes |
Overall, CLOs are an attractive option for income sectors and ETFs have made that attraction available to the masses. But what you pay for isn’t necessarily what you get. Credit quality even among the top tiers varies. To that end, caution may be warranted before making a buy decision.
The Bottom Line
The growth of collateralized loan obligation ETFs has been huge as investors look toward the asset class for gains. However, not all CLOS or their ETFs are the same. Investors need to dig into their funds and understand what they are buying.
1 Pitchbook (January 2025). CLO ETFs launch 2025 with buying spree – Barclays
2 PGIM (November 2024). Not All AAA CLO ETFs are Created Equal
