Opportunities in AAA CLOs | �۶��Ƶ Austria

Collateralized Loan Obligations (CLOs) have long been a cornerstone of the US securitized products market, evolving from niche institutional investments to a growing area of interest for broader investor audiences. As of May 2025, the global CLO market reached USD 1.2 trillion in assets, up from USD 430bn ten years ago.¹

Historically dominated by banks and insurance companies, the asset class is now more accessible through Exchange Traded Funds (ETFs), particularly those focusing on AAA-rated tranches. These ETFs provide investors with access to floating-rate income with strong credit quality. With increasing demand for income and diversification, the CLO ETF landscape is evolving – offering a liquid, transparent entry point to institutional-grade credit through both passive and active strategies.

Understanding AAA CLOs

CLOs are structured investment vehicles that pool loans, primarily to corporate borrowers, and tranche them into varying levels of risk and return. AAA-rated CLO tranches are considered the most secure, benefiting from the highest level of credit enhancement and first-priority claims on cash flows.

The growing appetite for AAA CLOs is driven by:

Floating-rate income: Helps shield investors from rising interest rates.
Superior carry: AAA CLO tranches offer a spread and carry premium versus comparably rated corporate bonds.
Credit resilience: No AAA-rated CLO has experienced a credit loss since the market’s inception.
Diversification: AAA CLO tranches have exhibited low correlations with other asset classes historically, offering significant potential diversification benefits to investors.

These characteristics have contributed to increased interest in CLO ETFs – vehicles that offer daily liquidity, transparency, and access to this high-quality fixed income segment.

CLO ETFs: Bridging institutional access and investor demand

ETF structures have transformed how investors engage with complex credit markets. CLO ETFs offer several benefits:

Access: Open the door to a previously hard-to-reach asset class.
Liquidity: ETFs provide daily trading flexibility on major exchanges.
Cost efficiency: Lower expense ratios compared to private fund structures.
Diversification: Exposure to varied underlying loans and CLO managers.

The role of active management

While CLO ETFs are actively managed by the underlying deal managers, ETF-level active management adds another important layer. This includes performing robust due diligence when selecting CLO managers – assessing their track record, credit expertise, and structural discipline across transactions.

Beyond manager selection, active portfolio construction plays a key role. This includes diversifying exposures across managers, vintages, and tranche profiles, as well as identifying relative value opportunities – such as participating in primary vs. secondary market deals, or positioning along the maturity spectrum.

This approach allows the investment team to respond to market dynamics within a high-grade, EUR-denominated AAA universe – aiming to enhance portfolio resilience and support consistent income over time.

Looking ahead: Broadening access to high-quality credit

As investors seek resilient sources of income and portfolio diversification, AAA-rated CLO ETFs can serve as a potential solution. They combine the credit quality and floating-rate nature of top-tier CLO tranches with the simplicity and liquidity of the ETF wrapper.

With growing awareness of CLOs structural benefits and increased ETF adoption in Europe, the market for AAA CLO ETFs may continue to evolve – offering both institutional and retail investors a new way to gain exposure to this segment.

Risk considerations

As with all investments, CLO ETFs are subject to risk. These include credit risk, particularly during periods of market stress, as well as structural risks specific to securitized products. Actively managed ETFs may also involve manager discretion risk, where investment decisions may not align with prevailing market conditions. Investors should consider their individual risk tolerance and investment horizon before making any allocation decisions.

¹ Bank of America Merrill Lynch, May 2025