Between the war in Iran, increasing likelihood the Federal Reserve won’t lower interest rates this years and stress in private credit markets, the first four months of 2026 have provided fixed income investors with more drama than they bargained for at the start of the year.
Collateralized loan obligations (CLOs), which are accessible via exchange traded funds (ETFs), are proving to be durable this year, indicating the asset class is worthy of advisors’ consideration. Of note, CLOs are among the fixed income segments where active management can be beneficial, if not preferred.
Active management is particularly important with CLOs because this a complex asset class that pools loans and other products. Add to that, CLOs are usually comprised of non-government, meaning there is an element of credit risk where active management can be advantageous in terms of damping.
In simple terms, this may not be the environment for passive aggregate bond strategies. Conversely, active CLO ETFs may provide clients with the income and interest rate flexibility they’re seeking. Let’s explore more of this asset class’s perks.
CLOs Right for the Moment and Beyond
CLOs are attractive and unique because they feature above-average levels of income with sturdy credit quality – a combination that’s often difficult to find in the bond market. Additionally, this is an asset class that is conducive to considering actively managed funds or ETFs because CLOs themselves are actively managed – a potential selling point for skittish clients.
Janus Henderson, a leading issuer of CLO ETFs, including the $27.06 billion AAA CLO ETF (JAAA), lays a compelling case for CLO exposure, including stability in this corner of the bond market and the aforementioned uncertainty in Fed policy.
“Another meaningful advantage then is that much of securitised universe is issued at the short-end, with spread durations – the sensitivity of an investment to the movement of spreads – of three to five years,” according to the asset manager. “Coupled with floating rate characteristics, this may help securitised portfolios avoid the duration‑driven losses seen elsewhere in some areas of the fixed income market.”
With the benefit of active management, ETFs such as JAAA and the $1.14 billion B-BBB CLO ETF (JBBB), not only deliver yields well in excess of bland aggregate bond ETFs and on par with high-yield funds, the CLO products are often less volatile than the highest-yielding junk bonds, confirming investors can have their cake (income) and eat it, too (stability).
Make the Collateralized Call
Funds such as JAAA and JBBB are proving their mettle this year, but skeptical investors and clients can rest assured that this par for the course for CLOs – an asset class with a reputation for durability likely to surprise the uninitiated.
Speaking of tumultuous market environments, CLOs have a history of being fixed income refuges for clients and that was on display during the brief coronavirus bear market in 2020 and prior to that.
“In an environment where uncertainty around growth, inflation and policy remains elevated, securitised credit continues to offer a combination of stability, income and risk control that is increasingly difficult to replicate elsewhere,” concludes Janus Henderson. “For investors seeking income, diversification and defensiveness within fixed income portfolios, we believe that securitised credit continues to stand out as a compelling allocation.”
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