Article Understanding CLOs: A guide to collateralised loan obligations

Invesco Opens in a new tab
24 October 2025
man running

In today’s evolving financial landscape, investors are constantly seeking innovative ways to potentially diversify portfolios and enhance returns. One increasingly prominent tool in their arsenal could be the Collateralised Loan Obligation (CLO)—a structured investment vehicle offering exposure to the leveraged loan market.

What are CLOs and why do they matter?

CLOs are actively managed portfolios of senior secured leveraged loans, packaged into tranches that distribute cash flows to investors based on a predefined structure. The CLO market has grown rapidly and is now a $1.3 trillion market having almost doubled in the last five years.

Global CLO market: Market size has continued to grow

Source: BofA Global Research, Intex through 30 Jun 2025

[This chart shows the US CLOs and European CLOs markets between June 2005 and June 2025]

These vehicles are designed to capture the spread between the interest earned on the underlying loans and the interest paid to investors—creating potential for attractive returns.

Unlike traditional fixed income instruments, CLOs offer:

  • Access to a resilient asset class: Leveraged loans have historically shown strong performance, especially in rising rate environments.
  • Active portfolio management: CLO managers dynamically adjust holdings to respond to market shifts.
  • Customisable risk exposure: Investors can select tranches that align with their risk-return preferences.

How CLOs work

A CLO begins with a pool of 200–400 unique borrowers, typically companies involved in M&A or private equity-backed transactions. These loans are bundled into a special purpose vehicle (SPV) and sold in tranches—from AAA-rated debt to equity.

The cash flow waterfall ensures that payments flow first to senior tranches, then to junior tranches, and finally to equity holders. This structure allows CLOs to offer differentiated risk profiles and potential for enhanced yield.

Key considerations for investors

While we believe CLOs offer compelling benefits, they also come with complexities:

  • Credit risk: The performance depends on the credit quality of underlying loans.
  • Liquidity risk: Some tranches may be harder to trade in stressed markets.
  • Interest rate sensitivity: Floating-rate loans can benefit from rising rates but also introduce volatility.

CLOs are best suited for professional and sophisticated investors who can assess these risks and understand the nuances of structured credit.

Conclusion

CLOs offer a distinctive investment opportunity by providing access to the leveraged loan market. With active management and structured cash flow distribution, we believe CLOs can be an attractive option for sophisticated investors looking to diversify their portfolios and achieve appealing returns. As with any investment, it is crucial for investors to conduct thorough due diligence and understand the associated risks before investing in CLOs.

For more detailed information, please refer to Understanding CLOs in Today’s Dynamic Financial Landscape.

Want to learn more? View our video about AAA-rated CLOs. 

Related products

These Funds are only suitable for professional and advanced private investors. For further details, please consult the Fund supplements.

Related insights

  • Investment risks

    For complete information on risks, refer to the legal documents.

    The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    The creditworthiness of the debt the Fund is exposed to may weaken and result in fluctuations in the value of the Fund. There is no guarantee the issuers of debt will repay the interest and capital on the redemption date. The risk is higher when the Fund is exposed to high yield debt securities.

    Changes in interest rates will result in fluctuations in the value of the Fund.

    It may be difficult for the Fund to buy or sell certain instruments in stressed market conditions. Consequently, the price obtained when selling such instruments may be lower than under normal market conditions.

    Highly rated tranches of CLO Debt Securities may be downgraded, and in stressed market environments even highly rated tranches of CLO Debt Securities may experience losses due to defaults in the underlying loan collateral, the disappearance of the subordinated/equity tranches, market anticipation of defaults, as well as negative market sentiment with respect to CLO securities as an asset class.

    Important information

    Data as at 31 July 2025, unless otherwise stated. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

    Views and opinions are based on current market conditions and are subject to change.

    For information on our funds and the relevant risks, refer to the Key Information Documents/Key Investor Information Documents (local languages) and Prospectus (English, French, German), and the financial reports, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.ie. The management company may terminate marketing arrangements.

    UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them. For the full objectives and investment policy please consult the current prospectus.

    Index: Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy.  The Index is used with permission.  The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright 2025, JPMorgan Chase & Co.  All rights reserved.

    Issued by Invesco Investment Management Limited, Ground Floor, 2 Cumberland Place, Fenian Street, Dublin 2, Ireland, regulated by the Central Bank of Ireland.

    Belgium: This product is offered in Belgium under the Public Offer Exemption. This material is intended only for professional investors and may not be used for an other purpose nor passed on to any other investor in Belgium.

    Switzerland: Issued by Invesco Asset Management (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland. The representative and paying agent in Switzerland is BNP PARIBAS, Paris, Zurich Branch, Selnaustrasse 16 8002 Zürich. The Prospectus, Key Information Document, financial reports and articles of incorporation may be obtained free of charge from the Representative. The ETFs are domiciled in Ireland.

    Italy: The publication of the supplement in Italy does not imply any judgment by CONSOB on an investment in a product. The list of products listed in Italy, and the offering documents for and the supplement of each product are available: (i) at etf.invesco.com (along with the audited annual report and the unaudited half-year reports); and (ii) on the website of the Italian Stock Exchange borsaitaliana.it.

    UK: Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. This fund is authorised overseas, not in the UK. The UK Financial Ombudsman Service is unlikely to be able to consider complaints about this fund, its management company, or its depositary. Any losses related to the management company or depositary are unlikely to be covered by the UK Financial Services Compensation Scheme.

    Israel: Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom. No action has been taken or will be taken in Israel that would permit a public offering of the Fund or distribution of this document to the public. This Fund has not been approved by the Israel Securities Authority (the ISA). The Fund shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1968, who in each case have provided written confirmation that they qualify as Sophisticated Investors, and that they are aware of the consequences of such designation and agree thereto and further that the Fund is being purchased for its own account and not for the purpose of re-sale or distribution other than, in the case of an offeree which is an Sophisticated Investor, where such offeree is purchasing product for another party which is an Sophisticated Investor. This document may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Nothing in this document should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Neither Invesco Ltd. nor its subsidiaries are licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder. This document does not constitute an offer to sell or solicitation of an offer to buy any securities or fund units other than the fund offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person to whom it is unlawful to make such offer or solicitation.

    EMEA4841913/2025