Investors poured $2.3 billion into this riskier corner of the bond market in July
Investors continued to move into collateralized loan obligations last month, scooping up attractive yields in a higher-for-longer interest rate environment. Collateralized loan obligations, or CLOs, are securitized pools of floating-rate loans to businesses. CLO exchange-traded funds saw $2.3 billion in inflows last month, according to LSEG data. For the year, $11.8 billion moved into the funds, LSEG found. Interest rates have remained elevated as the Federal Reserve remains split over monetary policy. It has held rates steady after delivering three cuts in 2025. Three members voted for a hike at the last meeting and some officials have spoken in favor of boosting rates as early as September. The market has also been betting on rate increases, although less so since the weak jobs report on Friday. Fed funds futures trading data suggests a 50% likelihood of an increase in September, according to the CME FedWatch tool . The next big test comes with Wednesday’s reading of the consumer price index , which could be key for the Fed’s September rate decision. In this environment, the floating-rate nature of CLOs makes them attractive since their coupon payments shift alongside short-term interest rate changes. In fact, CLOs outperformed other fixed-income assets in the first half of the year, according to Janus Henderson. Janus Henderson’s John Kerschner believes CLOs should always be a part of an investor’s portfolio no matter the interest rate environment. The only time CLOs won’t work is if the U.S. goes into a recession and rates suddenly drop, he said. “We don’t recommend people time the market,” said Kerschner, the firm’s global head of securitized products. “It is a good diversifier. It’s good yield,” he added. “It’s performed well. We think it can continue to perform well.” The Janus Henderson AAA CLO ETF (JAAA) has seen $5.73 billion in inflows this year, according to FactSet. The fund currently has a 30-day SEC yield of 4.87% and a net expense ratio of 0.20%. It has about $30 billion in assets under management as of Monday. JAAA YTD mountain Janus Henderson AAA CLO ETF year to date Cathy Bevan, global head of structured credit at Benefit Street Partners, believes CLOs offer good value right now. She is also co-manager of the Franklin BSP CLO ETF (YCLO) , which launched in June. It has a 30-day SEC yield of 4.46%, according to Morningstar. “There is lots of demand for these tranches [slices of a pool of loans], but the supply is so strong that actually that’s creating, in our mind, an opportunity where the CLO … yield you can get is very attractive versus the equivalent corporate credit risk,” she said. Fitting CLOs in your portfolio CLO ETFs can help diversify your portfolio, but shouldn’t make up a majority of your fixed-income holdings. Bevan sees them as a yield enhancer and believes the portion allocated to them depends on each investor’s risk tolerance. Investors can pick up more yield as they move down in ratings, although those CLOs rated AAA are the first in line to get paid if the borrower declares bankruptcy. However, Janus’ Kerschner suggests most individual investors stick with AAA-rated CLOs, although the firm also has a B-BBB CLO ETF (JBBB) . JBBB YTD mountain Janus Henderson B-BBB CLO ETF year to date The underlying assets are still considered investment grade, but have lower ratings and are therefore considered riskier. The ETF has a 5.97% 30-day SEC yield and a net expense ratio of 0.47%. Some $260 million in money has flowed into the ETF, bringing the total assets under management to $1.44 billion. “You probably don’t need that couple hundred basis points’ yield, given the amount of volatility it’s going to give you,” Kerschner said. “Most people who are investing have some equities, they have some fixed income. So like take your volatility with the equities.” However, for those who want to maximize their yield per given risk, he thinks the BBB-rated CLOs can make sense. “You definitely have to understand the use case for them, and we want to make sure the investors aren’t taken for a ride they’re not prepared for,” Kerschner said.
