CLO Fund Surges Past $4 Billion in Assets as Rates Rise

Exchange-traded funds that focus on collateralized loan obligations have seen billions in inflows as investors look to alternative fixed-income sources in an environment of rising interest rates. 

The Janus Henderson AAA CLO ETF (JAAA) broke through the $4 billion mark just shy of its third birthday earlier this month, with the $4.2 billion ETF attracting $2.3 billion in inflows since the beginning of 2023 and $330 million in the last month alone, according to etf.com data. As of October 16, 2023, the fund was the largest bond ETF launch by assets under management of the past three years. 

The asset inflows weren’t limited to JAAA. The $130 million Panagram BBB-B CLO ETF (CLOZ) gathered $127 million, with $42 million in inflows in the past month, while the $123 million Janus Henderson B-BBB CLO ETF (JBBB) raked in $37 million in 2023. 

The funds invest in CLOs, which are securities based on loans to businesses, usually smaller ones unable to access credit through the traditional bond market. The loans are pooled into different securities and often divided into sections called tranches, based on credit risk.  

JAAA, Other CLOs Boosted by Rates, Recession Fears

Two factors likely influenced the current popularity of CLO ETFs: rising rates and performance. 

“Investor demand for JAAA this year has been driven by the combination of rising rates and recession fears as well as the desire to have high-quality floating rate exposure,” said John Kerschner, Head of U.S. Securitized Products at Janus Henderson Investors. 

According to VanEck Investments, CLOs tend to be floating rate products, which means their yield changes along with interest rates. Because floating rate debt changes along with rates, rising rates are less of a risk.  

Another thing potentially attracting investors to CLO ETFs is performance. CLO’s have performed very well in recent months: CLOZ and the JBBB were the second- and third-best fixed-income ETFs by total return for the third quarter.  

Besides short-term performance, there’s evidence CLOs can perform in the longer term. A working paper from the Federal Reserve Bank of Philadelphia, found that CLO tranches offered higher returns than corporate bonds with similar ratings.  

Contact Gabe Alpert at [email protected]