Tony's ETF Buyers Guide: Collateralized Loan Obligation (CLO) ETFs

What is a CLO?

A CLO is an investment vehicle that invests in leveraged loans, also known as senior loans. Leveraged loans are a type of non-investment grade, floating rate bond issued by companies that rank senior to high yield bonds.

This means they have a first lien (read: dibs) on the company's assets, are secured by collateral, have higher recovery rates in case of default, and typically exhibit lower loss rates compared to unsecured high yield bonds.

When you get a bunch of these loans and put them together into a diversified pool of, say, 100-200 loans, you get a CLO. A CLO consists of different levels, or "tranches," each with varying risk and return.

A simple rule of thumb is that the senior tranches have first claim on the cash flows produced by the loan pool, making them safer, while the lower tranches take on more risk but offer higher returns.

But despite the underlying pool of loans being non-investment grade, a CLO can still be rated AAA. This high rating is due to the structured finance nature of CLOs, where the senior tranches have priority claims on cash flows and losses are absorbed by the lower tranches first.

In contrast, CDOs, which contributed to the 2008 financial crisis, mostly held subprime mortgages. These were less regulated, less liquid, less transparent, and scarcely covered by analysts. In contrast, CLOs are well-regulated, more transparent, and typically consist of better-quality assets.

Interestingly, when CDOs collapsed in 2008, CLOs performed relatively well. Despite their similar nomenclature, the fundamental differences in their underlying assets meant that CLOs weathered the storm and also managed through the market turmoil during the March 2020 COVID-19 crash.

In fact, VanEck notes that of the approximately $500 billion of U.S. CLOs issued from 1994 to 2009 and rated by S&P, only a minuscule 0.88% experienced defaults. In the higher-rated AAA and AA CLO tranches, there have been zero defaults.

CLO ETFs

The ETF Central screener currently shows 9 CLO ETFs available to investors, but this is likely to change as more asset managers target demand in this niche.

The largest CLO ETF by far is the Janus Henderson AAA CLO ETF

, boasting a staggering $10.35 billion in assets under management (AUM).

This ETF provides exposure to the institutional AAA CLO market with the transparency, liquidity, and accessibility of an ETF, allowing retail investors to trade CLOs just as they would with stocks.

It offers monthly distributions with a 6.67% 30-day SEC yield, making it an attractive income vehicle. Additionally, with a 0.21-year effective duration, it implies very low interest rate risk. The underlying portfolio currently includes 369 CLOs, each backed by a diversified pool of leveraged loans.

If you are willing to take on more risk, Janus Henderson also offers the second-largest CLO ETF, the Janus Henderson B-BBB CLO ETF

, with $917 million in AUM.

Similar to JAAA in structure, JBBB focuses on CLOs rated from B to BBB, encompassing non-investment grade to minimum investment grade. For the higher credit risk, you receive a greater 8.36% 30-day SEC yield with the usual monthly distributions and low duration.

That being said, while JAAA and JBBB are very popular, they aren't the only CLO ETFs available. Below, you can find seven other options, sorted in descending order by AUM:

1. Panagram BBB-B CLO ETF
   CLOZ
   +0.25%
2. VanEck CLO ETF
   CLOI
   -0.01%
3. BlackRock AAA CLO ETF
   CLOA
   +0.03%
4. PGIM AAA CLO ETF
   PAAA
   +0.01%
5. Invesco AAA CLO Floating Rate Note ETF
   ICLO
   -0.08%
6. Panagram AAA CLO ETF
   CLOX
   +0.02%
7. AXS First Priority CLO Bond ETF
   AAA
   -0.12%

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.