Seek higher income with CLOs

1. Diversify income with a focus on quality

AAA CLOs seek to offer diversified income by pooling exposure across loans. Their structure (AAA rated) enables investors to keep a focus on quality — strengthening or maintaining portfolio credit ratings — while still seeking higher yield.

2. Low duration

AAA CLOs pay a floating rate coupon that resets quarterly with risk-free rates, resulting in a low duration of approximately 0.25 years⁴ - offering potential protection in a changing interest rate environment.

3. Uncorrelated returns

AAA CLOs are relatively uncorrelated with traditional fixed income, meaning their returns don’t closely track those of core bonds — based on five-year return correlations to the Global Aggregate Index.⁵

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product.

CLOs can offer attractive yields and diversification, but they also come with risks investors need to consider:

1. Credit risk

CLOs are backed by leveraged loans which are typically below investment grade. If borrowers in the loan pool default, the cash flows to CLO investors may be reduced.

2. Liquidity risk

CLO tranches (especially the lower rated) are less liquid than traditional bonds or ETFs. Selling in stressed markets can be difficult or require steep discounts.

3. Spread risk

CLO valuations are sensitive to credit spreads. If spreads widen (e.g. during recessions or market stress), CLO prices can drop even if the underlying loans don’t default.

4. Interest rate risk

CLO loans and tranches are generally floating-rate, which reduces duration risk. However, higher rates can pressure loan issuers (borrowers), leading to higher default risk.

5. Regulatory risk

CLOs are subject to evolving banking and securities regulations (e.g. risk retention rules, capital treatment). Regulatory changes can affect issuance, liquidity or investor demand.

1. Access

• Traditionally CLOs were only available to large institutional investors through complex, illiquid tranches.
• With the launch of CLO ETFs, all types of professional investors can now gain exposure to CLOs in a simpler, exchange-traded format.

2. Liquidity and transparency

• CLO ETFs trade on stock exchanges, offering daily liquidity, unlike traditional CLOs that are difficult to buy or sell quickly.
• They provide transparency through regular reporting of holdings and pricing, reducing the opacity of traditional CLO structures.

3. Diversification

• Instead of selecting individual CLO tranches, investors get instant diversification across multiple CLO deals and managers.
• ETFs often focus on investment-grade (AAA/AA) CLO tranches, making the product more accessible and suitable for a wider range of investors.

Risk: Diversification and asset allocation may not fully protect you from market risk.

4. Lower barriers to entry

• ETFs remove the need for specialised expertise, large minimum investments or complex due diligence.
• Investors can access the CLO market with the same ease as buying a stock or bond ETF.

5. Cost efficiency

• CLOs were traditionally complex and costly, limiting access to only the largest investors.
• Now ETFs provide a simple, transparent and cost-efficient entry point for all investor types — offering access to CLOs at just a fraction of the cost compared to traditional mutual funds or investing in single CLO tranches.