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CLO ETFs tout steadier yield profile versus corporate bonds
CLO 2.0 tranches rated AAA and BBB show a 0.0% cumulative default rate, versus about 1.0% for AAA and 5.0% for BBB corporate bonds, according to S&P data cited by ETF Trends.
ETF Trends highlighted arguments from Reckoner Capital Management CEO John Kim that collateralized loan obligations, or CLOs, can offer a steadier risk profile than traditional corporate credit for income-focused investors, pointing to market structure and historical impairment outcomes.
According to the article, CLOs are backed by a diversified pool of senior secured loans that support top-of-capital-structure tranches, with cash-flow diversion mechanisms designed to protect senior bondholders if the underlying loans are stressed. The outlet contrasted this with typical corporate bonds, which are described as unsecured obligations tied directly to individual issuer default risk.
ETF Trends cited long-term rating agency data compiled by S&P to show what it calls a sharp gap between structured credit and corporate defaults in the post-crisis CLO 2.0 era. The article says AAA- and BBB-rated CLO tranches have maintained a cumulative default rate of exactly 0.0%, while similarly rated corporate bonds had default rates of roughly 1.0% for AAA and 5.0% for BBB, and it added that BB-rated CLOs recorded a 0.58% default rate versus about 15.9% for comparable high-yield corporate bonds.
The piece also noted two active funds discussed during a TMX VettaFi webcast, including the Reckoner Yield Enhanced AAA CLO ETF (RAAA), as ways investors may gain exposure to CLOs.