How Well Did CLO ETFs Hold Up During Market Volatility?

CLO ETFs: drawdowns

Looking at the drawdown chart from January 2022 through September 2025, the differences between CLO ETFs and traditional bond ETFs stand out.

JAAA was the most stable of the group. Its drawdowns were minimal, even during periods of market stress, and it quickly reverted to par. That reflects the structure of AAA CLO tranches, which sit at the top of the repayment waterfall and are designed to be highly resilient to credit shocks.

JBBB showed more volatility, but still fared better than traditional credit ETFs. Its largest drawdowns were modest compared to high yield bonds and were quickly recovered, suggesting the market sees BBB CLOs as less risky than a diversified basket of speculative-grade corporate bonds.

By contrast, LQD and HYG both suffered materially deeper drawdowns. LQD, despite being investment grade, faced sustained losses due to its higher duration and sensitivity to rising rates. HYG was hit hardest, with drawdowns exceeding -20% at times, reflecting its higher credit risk and exposure to market liquidity.

From my perspective, this backtest underscores that CLO ETFs, particularly JAAA, have held up well in volatile markets, living up to expectations.

CLO ETFs: discount to NAV

Drawdowns don’t capture the full picture of fixed income ETF resilience. Another key test is whether market prices stay aligned with NAV, since investors transact at market price, not NAV. Normally, authorized participants keep prices close through creations and redemptions.

But in stressed markets, when liquidity in the underlying securities dries up, that mechanism can break down and gaps can appear, as seen below.

Looking at the worst points in the chart, JAAA held up the best. Its steepest discounts were brief and shallow, around −0.8% to −1.0%, with quick mean reversion. JBBB was more volatile, at times falling to roughly −1.8% to −2.0% during mid-2024 and early-2025. That’s consistent with the lower liquidity of BBB-rated tranches and their higher sensitivity to risk-off events.

Among the traditional bond ETFs, LQD’s deepest discount reached about −1.0% to −1.2%, with occasional spikes into premium territory near +1%. HYG showed the widest swings overall, with discounts near −1.5% to −2.0% at its worst, and premiums as high as +1%, reflecting the more volatile nature of high-yield credit.

The takeaway is that CLO ETFs weathered stress periods without major dislocations. JAAA was the most stable, JBBB showed more movement but remained manageable, and both stayed tighter to NAV than HYG, which proved the most volatile.

For investors, this suggests CLO ETFs have so far avoided the structural pricing gaps that have historically troubled some fixed income ETFs, though 1–2% air pockets remain possible in periods of severe stress. That being said, a COVID-19-like drawdown would likely result in higher discounts to NAV.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.