High yields allow you to generate more cash flow from your capital, which can aid investors who want to use asset income to cover some of their living expenses. Some investors are turning to collateralized loan obligations to generate income from their investments.
CLOs reward investors when corporations make monthly loan payments. Financial institutions have used these financial instruments for years, but they have only recently become more accessible to retail investors. They typically have higher yields than corporate bonds due to the underlying loans’ credit risk. Higher yields have helped CLO tranches (groups of interest-paying bonds) perform well compared with some other corporate debt categories.
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CLO exchange-traded funds, or ETFs, are still relatively new. The Janus Henderson AAA CLO ETF, one of the “veteran” ETFs, is approaching its five-year anniversary. The fund has $20.1 billion in total net assets.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have about $2 billion in assets under management, or AUM, combined.
CLOs have some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
However, CLOs had comparable performance to investment-grade corporate bonds during the COVID-19 sell-off in March 2020, showing resilience in a volatile market, according to investment firm VanEck. In that scenario, CLOs performed better than high-yield bonds and leveraged loans.
That said, here’s a brief introduction to how collateralized loan obligations work, with some CLO ETF ideas to consider:
What Is a Collateralized Loan Obligation?
CLOs have existed long before collateralized loan obligation ETFs found themselves in the spotlight. According to S&P Global, “Collateralized loan obligations have performed well since their inception nearly 30 years ago and are a core asset class within structured finance, connecting investors around the globe with companies in the leveraged finance and private credit markets.”
Investors realize profits when corporations pay off their debt. These assets offer a combination of portfolio diversification and high yields. CLOs give investors exposure to hundreds of companies that are making loan payments, and CLO ETFs give you exposure to many CLOs. A CLO ETF offers a level of diversification that you can’t get with most high-yield ETFs.
Collateralized Loan Obligation vs. Collateralized Debt Obligation
Collateralized Loan Obligation
If collateralized loan obligations sound familiar, you may be thinking about collateralized debt obligations, or CDOs, an asset that was mentioned often in the 2015 film “The Big Short.” As explained in the movie, collateralized debt obligations inflated the housing bubble in the early 2000s and contributed to the Great Recession.
Can investors trust an asset like CDOs, and how do they differ from CLOs? Collateralized debt obligations are securities that contain individual loans and other CDOs. The issue with CDOs leading up to the Great Recession was that many of them included subprime mortgages. When borrowers couldn’t pay their subprime mortgages, many CDOs collapsed.
Collateralized loan obligations give investors exposure to leveraged loans. These loans are like high-yield bonds and get paid by large corporations. While CLOs rely on multibillion-dollar corporations to cover loan payments, some CDOs rely on consumers to cover mortgage payments. The latter faced struggles as subprime mortgage payments became unfeasible because the loan requirements attracted borrowers who couldn’t afford the monthly mortgage payments.
Owners of leveraged loans are paid out before bonds if a company goes bankrupt. The leveraged lender can receive appropriate assets to cover the loan’s balance before bondholders receive compensation.
CLOs have lower credit risk and typically have higher-quality borrowers than CDOs. These differences make CLOs more resilient to economic uncertainty than CDOs.
5 CLO ETFs That Reduce Risk
Collateralized loan obligation ETFs minimize the risk of traditional CLOs. While a CLO gives you exposure to more than 100 corporate loans in some cases, CLO ETFs give you exposure to several CLOs. Investors looking for high yields and reduced risk may want to consider investing in these five CLO ETFs:
| CLO ETF | Expense Ratio | 30-Day SEC Yield* |
| VanEck CLO ETF (ticker: CLOI) | 0.40% | 5.82% |
| Alternative Access First Priority CLO Bond ETF (AAA) | 0.25% | 5.33%** |
| Janus Henderson AAA CLO ETF (JAAA) | 0.20% | 5.45% |
| Janus Henderson B-BBB CLO ETF (JBBB) | 0.48% | 8.51% |
| BlackRock AAA CLO ETF (CLOA) | 0.20% | 5.63% |
*Sources: Morningstar, fund companies. As of April 30.**As of March 31.
VanEck CLO ETF (CLOI)
The VanEck CLO ETF aims to preserve capital and generate income
through various investment-grade-rated tranches of CLOs. The fund is flexible with maturity dates and offers a 30-day SEC yield of 5.8%. Right now, most of the fund’s CLOs mature within the next seven to 15 years.
CLOI allocates 17.5% of its assets to AAA-rated CLOs and an additional 18.5% to AA-rated CLOs. However, almost half of the fund’s CLOs currently do not have a rating. The VanEck CLO ETF has delivered a 6.4% return over the past year by net asset value (NAV). The fund was launched on June 21, 2022, and it has $1.1 billion in net assets. It also has a 0.4% expense ratio.
Alternative Access First Priority CLO Bond ETF (AAA)
The Alternative Access First Priority CLO Bond ETF has delivered a 5.8% NAV return over the past year and has a 0.25% expense ratio. More than a quarter of the fund’s CLOs are AAA-rated. It has 46 bond holdings and offers a 30-day SEC yield of 5.3%.
AAA has been around since September 2020, and it currently has $42.4 million in assets under management. Morningstar gave the fund a five-star rating, and it also has a stamp of approval from the fund’s management team. Peter Coppa has been the sole manager since the fund’s inception, and he has more than $1 million of his own capital invested in the fund. It can be read as a sign of confidence that the fund manager has that much skin in the game.
Janus Henderson AAA CLO ETF (JAAA)
The Janus Henderson AAA CLO ETF has delivered a 6% NAV return over the past year while providing a 30-day SEC yield of 5.5%. The yield is more than enough to cover the fund’s 0.2% expense ratio, and the distributions are paid out monthly.
JAAA has about 390 holdings and puts most of its assets into AAA-rated CLOs. This allocation can help investors navigate the uncertainties of tariffs and other market conditions. More than 90% of its portfolio is allocated toward CLOs in North America, and most of the CLOs mature within three to seven years. JAAA uses the J.P. Morgan CLO AAA Index (CLOIE) as a benchmark and has been around since October 2020.
Janus Henderson B-BBB CLO ETF (JBBB)
The Janus Henderson B-BBB CLO ETF is for investors who want to incur more risk for a higher yield. BBB-rated debt is still likely to get paid, but AAA is the gold standard. JBBB has a 30-day SEC yield of 8.5% and has a 0.48% expense ratio. The fund uses the J.P. Morgan CLO BBB Index as its benchmark, and JBBB is up 6.3% over the past year. Just like JAAA, JBBB gives out monthly cash distributions.
The fund’s weighted average maturity is 6.6 years, and roughly half of the fund’s holdings mature within five to seven years. JBBB has 85% of its assets in Baa-rated CLOs, and the remaining capital is distributed between A-rated debt, Ba-rated debt and cash. Almost 90% of the fund’s total assets are invested in North American debt. JBBB distributes those assets across 204 bond holdings.
BlackRock AAA CLO ETF (CLOA)
The BlackRock AAA CLO ETF offers the potential for higher income and lower volatility. The portfolio consists of mostly AAA-rated CLOs and uses CLOIE as its benchmark. The fund launched in January 2023, and it offers monthly cash distributions. The 30-day SEC yield is currently 5.6%, and the fund has a 0.2% expense ratio.
The BlackRock AAA CLO ETF has about 270 holdings, and no CLO holding makes up more than 1% of the fund’s total assets. CLOA’s CLOs have a weighted average maturity of 3.1 years with an average yield to maturity of 6.1%. Broken down, 26% of the fund’s CLOs mature within two to three years, and 33% mature within three to five years.
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Collateralized Loan Obligations: 5 CLO ETFs to Buy originally appeared on usnews.com
Update 05/06/25: This story was previously published at an earlier date and has been updated with new information.