The Growing Appeal of Collateralized Loan Obligations in the ETF Market

Collateralized loan obligations may become the next major push in the exchange-traded fund industry. VettaFi’s Todd Rosenbluth noted there is growing investor demand for alternative assets given the ongoing uncertainty around interest rates. “[CLOs] have been popular within the marketplace,” the firm’s head of research said during CNBC’s “ETF Edge” this week. CLOs are short-term fixed-income strategies made up of pools of floating-rate secured loans, designed to deliver stability and attractive yields across different market cycles. Rosenbluth added that fixed-income ETF demand has been strong and is likely to persist, as investors wait for more clarity on the Fed’s next move. He also pointed out that the Fed’s decision to maintain interest rates unchanged last month has acted as a catalyst for short-term product demand. The industry is clearly acknowledging investor interest, with Reckoner Capital Management—an ETF provider specializing in CLOs—being recognized as an active creator of new CLO ETFs this year. Furthermore, TCW Group’s global head of distribution, Jennifer Grancio, noted a preference among advisors for fixed income, alongside some interest in short-duration or CLO products. Rosenbluth highlighted that CLO ETFs carry certain risks. While AAA-rated CLO tranches generally boast near-zero default rates, lower-tier tranches (BBB-B) face heightened default risk and market volatility during economic stress. Additionally, corporate loans in CLO pools carry significant exposure to technology and software sectors, meaning private credit jitters or tech selloffs can spill over and trigger spread widening. As a result, investors are typically seeking AAA-rated and senior-secured assets to capture attractive yields without the long-term maturity risk.

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