With the looming government shutdown, investors are reminded of one big thing. Uncertainty is now the norm. Many risks and deeper issues have been brought to the forefront. And while many fixed-income investors believe they are safe from these issues, given the steady nature of bond investing, the reality is that even risk-free Treasury bonds aren’t entirely risk-free anymore. Finding opportunities among this uncertainty is now a paramount issue for bond portfolios.
Collateralized debt obligations (CLOs) could be the answer to this problem.
Offering strong credit quality and high yields, CLOs could offer a bargain play on stability in the current environment. And now with plenty of choices, regular retail investors can add the once-reserved asset class to their portfolios.
Packages Of Loans
CLOs- which shouldn’t be confused with collateralized debt obligations (CDOs)- are a unique asset class within the fixed income space. CLOs are essentially packages of loans- typically 150 to 250 -that are placed into a single security. In this case, most CLOs are senior secured loans made to corporate or private equity borrowers.
For many pension funds, endowments, institutions, and high-net-worth investors, CLOs have long been utilized to enhance performance and add yield to a fixed-income portfolio. However, it’s only recently that ordinary people have explored these assets. Advances in ETFs and the rise of private credit have led to increased adoption.
Steadfast Amid Tariffs
At first glance, CLOs could be perceived as risky. After all, these are loans made to various private borrowers. But the reality is something different. CLOs have been steadfast amid default risks and the current rising volatility within the fixed income space.
As the Liberation Day Tariffs have increased overall volatility within the fixed income space —especially for bread-and-butter treasury bonds —CLOs have been strong. According to asset manager Nuveen, while credit spreads for top CLO tranches initially spiked and saw a sell-off, the sector quickly recovered. Within a month, prices and spreads had returned to their pre-tariff announcement levels. That trend continues today, with CLOs’ prices just under their pre-Liberation Day values. 1
This chart from the asset manager highlights the rebound in AAA, AA, and BB-rated CLO bonds.
Source: Nuveen
The question is, why have CLOs been so resilient amid the volatility when many safe-haven assets, like the 10-year Treasury, have been so volatile and erratic? The answer comes down to structure.
The key difference of CLOs versus other securitized debt is that these loans are arranged in what’s called tranches. Each tranche is rated based on credit risk, ranging from AAA to BB, with an equity tranche at the bottom. The difference is that the underlying bonds in the CLO aren’t divided up into these tranches. Still, their cash flows are distributed to the CLO investors according to a waterfall method. That means the senior tranches (AAA, AA) receive payment first, followed by the next tier, and so forth down the ladder. When a loan is paid off, the remaining funds are distributed in order of seniority of the tranches, with any remaining proceeds returning to the equity holders at the bottom. So, even if a few loans in the CLO default, those at the top get the cash first and are often paid in full.
With that, in the roughly 30-year history of the sector, next to zero AAA to A-rated CLO tranches have defaulted, while only 4.18% of speculative grade CLOs have experienced defaults. This compares to over 2% for investment-grade corporate bonds and 29% of all high-yield corporate debt. Adding to CLOs’ appeal is that many of these loans are often backed by receivables, equipment, real estate, and other physical assets. 2
Due to this waterfall method of cash flow and the steadfastness of payment, CLOs have managed to produce lower volatility than many bond asset classes. And when they dip —as with the tariff announcements —they quickly recover. Moreover, their unique structure enables them to offer a level of diversification compared to other fixed-income asset classes, providing non-correlated protection —exactly what investors need in this environment.
Why CLOs Today?
Thanks to their structure, CLOs have been able to remain stable when the overall fixed income market has been volatile. This structure and waterfall cash flow could come in very handy as continued risks unfold. So, betting on the sector is a prudent move.
And right now, it could be the time to do it. While CLOs have recovered, Nuveen notes that they are just under their pre-tariff prices and now offer higher yields than before. That’s a great place to start buying the sector, and it could lead to compression and higher values as the economy continues to improve.
Now, buying an individual CLO bond is next to impossible for the average Joe. However, the surge in private credit interest and ETFs has made the asset class more easily accessible. There are now numerous funds that cover the sector, including some huge ones.
CLO ETFs
These ETFs were selected based on their ability to provide exposure to the CLO market. They are sorted by their one-year total return, which ranges from 6.9% to 10.2%. They have expense ratios ranging from 0.19% to 0.50% and assets under management of $240 million to $ 16 billion. They are currently yielding between 5.2% and 8.1%.
| Ticker | Name | AUM | 1-year Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JBBB | Janus Henderson B-BBB CLO ETF | $1.35B | 10.2% | 8.1% | 0.50% | ETF | Yes |
| CLOI | VanEck CLO ETF | $749M | 8.1% | 6.3% | 0.40% | ETF | Yes |
| JAAA | Janus Henderson AAA CLO ETF | $15.6B | 7.3% | 6% | 0.22% | ETF | Yes |
| PAAA | PGIM AAA CLO ETF | $1.39B | 7.3% | 5.2% | 0.19% | ETF | Yes |
| CLOA | iShares AAA CLO Active ETF | $244M | 6.9% | 5.7% | 0.20% | ETF | Yes |
Overall, CLOs and their unique waterfall cash flow method make them an ideal security for bond portfolios. They can produce more stability than many investors crave while still providing a generous yield. With that in mind, the time to add a dose of CLOs could be now.
Bottom Line
Volatility has taken hold in the fixed-income space. But CLOs could be the answer. Thanks to their structures, CLOS offer investors a chance to score high yields while still maintaining a level of safety. And with prices still low, they can also experience some nice appreciation.
1 Nuveen (August 2025). CLOs in focus: Opportunity amid uncertainty
2 Nuveen Private Markets (August 2025). Building diversified portfolios with CLOs
