CLO ETFs: Retail Access to the CLO Market

Until 2020, CLO investments were largely inaccessible to retail investors due to $1-2 million minimum investment requirements and accredited investor restrictions. The launch of CLO-focused exchange-traded funds (ETFs) democratized access, allowing individual investors to gain exposure to AAA-rated and mezzanine CLO tranches through standard brokerage accounts.

This guide covers the mechanics, strategies, risks, and comparative analysis of CLO ETFs—essential reading for investors considering this asset class.

Why CLO ETFs Exist

CLO ETFs solve several structural barriers that historically limited retail participation:

• Minimum investment size: Direct CLO tranches require $1M+ commitments. ETFs allow purchases starting at the price of a single share ($10-50).
• Liquidity: Individual CLO tranches trade infrequently in over-the-counter markets. ETFs trade daily on exchanges with tight bid-ask spreads.
• Diversification: Building a diversified CLO portfolio requires purchasing tranches from 10+ different CLOs ($10M+ total). A single ETF holds 50-150+ tranches.
• Accessibility: Direct CLO purchases require institutional relationships and accredited investor status. ETFs are available to all investors through standard brokerage accounts.
• Transparency: ETFs publish daily NAVs and quarterly holdings, vs. monthly trustee reports for individual CLOs.

Overview of Major CLO ETFs

Note: Yields are approximate and fluctuate based on SOFR rates and market conditions. AUM figures as of Q4 2024. Always verify current data before investing.

AAA-Focused ETFs: JAAA, CLOA, CLOI

Investment Profile

• Target investors: Conservative income-seekers; retirees; bond allocators seeking floating-rate exposure
• Risk profile: Low credit risk (AAA-rated portfolios); moderate interest rate sensitivity; mark-to-market volatility
• Yield premium: Typically 40-100 bps above AAA corporate bonds of similar duration
• Floating-rate benefit: Quarterly resets based on SOFR provide natural inflation hedge

JAAA vs CLOA: Key Differences

Which to choose? For most investors, the difference is minimal. CLOA has a lower expense ratio (8 bps advantage), while JAAA has deeper liquidity and longer track record. Both are high-quality AAA CLO portfolios.

Mezzanine/High-Yield CLO ETFs: CLOZ

Investment Profile

• Target investors: Yield-focused investors; high-yield bond allocators; those willing to accept higher credit risk for higher income
• Risk profile: Higher credit risk (BBB/BB/B-rated); potential for NAV volatility; subordinated to AAA tranches
• Yield premium: Typically 250-400 bps above AAA CLO ETFs (8.5-9.5% vs 5.8-6.5%)
• Credit sensitivity: More exposed to default rates and coverage test failures

CLOZ Strategy

CLOZ (Panagram BBB-B CLO ETF) invests in mezzanine and junior tranches of CLOs:

• Typical holdings: BBB (35-45%), BB (30-40%), B (15-25%) rated CLO tranches
• Yield driver: These tranches sit below AAA/AA in the capital structure, earning higher spreads (SOFR + 300-600 bps)
• Risk: If underlying loan portfolios deteriorate, coverage tests can fail, diverting interest from these tranches to AAA/AA tranches
• Historical performance: During March 2020 (COVID crisis), mezzanine CLO tranches saw NAV declines of 15-25% before recovering

When to Consider CLOZ vs JAAA

CLO ETFs vs Leveraged Loan ETFs (e.g., LOAN)

Many investors confuse CLO ETFs with leveraged loan ETFs. They are not the same:

Key insight: Leveraged loan ETFs own the underlying loans. CLO ETFs own structured securities backed by those loans. For AAA CLO ETFs, the structural protections make them significantly safer than direct loan exposure.

Risks of CLO ETFs

While CLO ETFs provide accessible exposure to an asset class with a strong track record, investors must understand the risks:

1. Premium/Discount to NAV

• Issue: ETF market price can trade above or below the net asset value (NAV) of underlying holdings.
• Magnitude: Typically ±0.5-2% for liquid CLO ETFs like JAAA; can widen to ±5% during market stress.
• Impact: Buying at a premium means paying more than intrinsic value; selling at a discount means realizing less.
• Mitigation: Use limit orders; avoid trading during market open/close when spreads widen.

2. Mark-to-Market Volatility

• Issue: CLO tranches held by ETFs are marked to market daily. CLO secondary market prices can be volatile, even if credit fundamentals are stable.
• 2020 Example: AAA CLO tranches that never missed a payment saw market prices fall from par to 85-90 cents in March 2020, causing AAA CLO ETF NAVs to drop 8-12%.
• Reality check: Price ≠ credit impairment. Many investors who held through 2020 saw full NAV recovery by Q4 2020.

3. Liquidity Risk

• Issue: Individual CLO tranches trade infrequently. During market dislocations, ETF managers may struggle to sell holdings at fair prices.
• ETF advantage: ETFs provide daily liquidity to shareholders even when underlying holdings are illiquid (via creation/redemption mechanism).
• Caveat: During extreme stress (March 2020), bid-ask spreads on CLO ETFs widened from 5-10 bps to 50+ bps.

4. Credit Risk (Mezzanine ETFs)

• Issue: BBB/BB/B-rated CLO tranches can experience payment deferrals if coverage tests fail.
• Historical precedent: During 2008-2009, some mezzanine tranches had interest payments diverted to senior tranches for 12-24 months.
• Impact on ETF: Reduced income distributions; potential NAV decline.

5. Interest Rate Sensitivity

• Myth: "CLOs are floating-rate, so they have no interest rate risk."
• Reality: While CLO coupons reset quarterly (reducing duration risk), CLO tranche spreads are sensitive to credit market conditions.
• Scenario: If the Fed cuts rates rapidly, SOFR falls, and absolute yields decline—even though spreads remain constant.
• Spread widening: During risk-off periods, CLO spreads can widen 50-100 bps, causing NAV declines.

Learn more about CLO credit risk →

Learn more about interest rate risk →

Tax Considerations

CLO ETFs generate taxable income, and the tax treatment can be complex:

• Income classification: Most distributions are ordinary income (not qualified dividends), taxed at your marginal income tax rate.
• Monthly distributions: Most CLO ETFs distribute monthly, creating 12 taxable events per year.
• Tax-deferred accounts: CLO ETFs are often best held in IRAs, 401(k)s, or other tax-advantaged accounts to avoid annual income tax on distributions.
• Potential for return of capital: Some distributions may include return of capital (ROC), which reduces cost basis and defers taxation.
• 1099 complexity: CLO ETFs may issue complex 1099 forms with multiple income categories.

How to Use CLO ETFs in a Portfolio

As a Bond Allocation Replacement

• Use case: Replace 10-30% of aggregate bond fund with AAA CLO ETF (JAAA/CLOA)
• Benefit: Higher yield (6%+ vs 4-5% for IG corporates); floating-rate exposure hedges inflation
• Risk: Slightly higher volatility than investment-grade bond funds

As a High-Yield Bond Complement

• Use case: Allocate to mezzanine CLO ETF (CLOZ) alongside high-yield bond fund
• Benefit: Similar yields to HY bonds; structural protections (subordination) may offer better risk-adjusted returns
• Risk: Correlation to credit markets; will decline during risk-off periods

As an Income Ladder

• Strategy: Allocate across risk spectrum: 50% JAAA (conservative), 30% CLOI (moderate), 20% CLOZ (aggressive)
• Blended yield: ~7-7.5%
• Diversification: Reduces single-tranche concentration risk

Comparison to Direct CLO Investing

For most retail investors, CLO ETFs are the superior choice due to accessibility, diversification, and liquidity. Direct CLO investing is reserved for institutional investors and ultra-high-net-worth individuals.

Frequently Asked Questions

Are CLO ETFs safe?

AAA-rated CLO ETFs (JAAA, CLOA) hold portfolios of AAA-rated securities that have never defaulted in 30+ years. However, "safe" does not mean "zero volatility." NAVs can decline during market stress, even if credit fundamentals remain sound.

What happens to CLO ETFs if interest rates fall?

CLO coupons are floating-rate (SOFR + spread), so absolute yields will decline if SOFR falls. However, CLO spreads typically remain stable unless credit conditions deteriorate.

Can I lose money in JAAA?

Yes. While AAA defaults are extremely unlikely, you can lose money through: (1) selling during a NAV drawdown, (2) spread widening, or (3) trading at a discount to NAV.

Are CLO ETFs better than bond funds?

It depends on your goals. CLO ETFs offer higher yields and floating-rate exposure, but they are less liquid and more volatile than core bond funds. They complement—not replace—traditional bond allocations.

Next Steps

• CLO Debt Investing – Understand direct CLO tranche investing
• Historical Returns – Performance data across credit cycles
• Credit Risk Analysis – Deep dive on default scenarios
• CLO vs CDO – Why CLOs are different from 2008 CDOs