ETFs have democratised access to the US$1.3 trillion CLO market, opening this growing asset class to a broader range of investors.
ETFs provide diversified, low-cost, and liquid exposure to AAA-rated CLOs, allowing investors to trade efficiently without dealing directly with complex underlying securities.
Active management is essential in CLO investing and can add value by selecting top tier managers, managing risk, and capturing relative value.
The Collateralised Loan Obligation (CLO) market has quietly grown into a US$1.3 trillion1 segment of fixed income, nearly doubling in size over the past five years. Despite its scale, CLOs remain one of the least understood asset classes in fixed income, largely due to its private credit nature and historical inaccessibility to most investors. Until recently, only the largest institutional investors could participate in this market, particularly in the highest-rated AAA tranches.
That changed with the launch of ETFs focused on AAA CLO notes. The first of such ETFs were introduced in the US about five years ago. Since then, these ETFs have gained traction globally, including in Europe following regulatory developments. Today, actively managed AAA CLO ETFs see over US$27 billion in assets2, reflecting growing demand from a broader investor base seeking yield, credit quality, and diversification.
CLOs are securitised vehicles backed primarily by senior secured leveraged loans, which are floating-rate instruments typically used in M&A and private equity buyouts, and by both private and public companies for various reasons. These loans, rated below investment grade, are syndicated by banks and actively traded in secondary markets. A CLO pools loans from hundreds of unique borrowers and distributes interest and principal payments through a structured waterfall to various tranches, with the highest-rated AAA tranches sitting at the top of the capital structure.
We believe AAA CLOs are particularly attractive because they can offer high credit quality, floating-rate exposure, and historically low default rates. However, their complexity and limited liquidity have made them difficult to access for most investors, until ETFs entered this space.
Until very recently, CLOs were only easily accessible to the largest institutional investors. Although new CLO deals come to market regularly, historically the AAA tranches would have been bought in the primary market by a few large institutions while smaller investors would not have been able to access much of the market. ETFs have provided an access point to this asset class for a much wider range of investors. But it’s not just the access point that they provide; the ETF structure is particularly beneficial for certain fixed income segments like AAA CLOs, which may not be as liquid as traditional public fixed income markets.
Let’s look at some key potential benefits of ETFs for fixed income. Like the CLO market, the European fixed income ETF market has grown rapidly in recent years, with assets under management almost doubling to US$570 billion in the five years to June 2025. The ETF vehicle has continued to see broader adoption with investors now spanning from small retail clients to the largest, most sophisticated institutional asset managers in the world.
These benefits are particularly valuable in less liquid markets like CLOs. While the CLO market is large, its private credit nature means individual securities may not trade frequently. ETFs mitigate this challenge by offering exposure via a liquid secondary market, where investors can buy or sell shares without triggering transactions in the underlying CLO notes.
This mechanism allows market makers to manage inventory and risk efficiently, often resulting in tighter bid-offer spreads than the underlying securities themselves. For many investors, this means they can swiftly adjust exposures to the CLO asset class, especially during periods of market dislocation, without needing granular issuer-level knowledge. Not only could they adjust their allocation almost immediately after the decision-making process, but they would gain diversified exposure to that asset class in a single trade.
While passive ETFs offer broad exposure, active management adds an important layer of value in the CLO space. CLOs are complex instruments with varying structures, collateral quality, and manager performance. Using an experienced specialised active manager can help:
In short, active management allows investors to benefit not just from access and efficiency, but also from specialised decision making and risk management.
AAA CLOs offer a compelling combination of yield, credit quality, and floating-rate exposure. Historically reserved for large institutions, they are now accessible to a wider range of investors through ETFs. The ETF structure provides liquidity, transparency, and efficiency, making it an ideal vehicle for accessing this complex asset class.
Active management within the ETF wrapper, especially in a complex asset class, adds value for investors. By combining the structural advantages of ETFs with the expertise of active managers, investors can gain efficient and targeted exposure to AAA CLOs. As the CLO market continues to evolve, actively managed ETFs are poised to play a central role in how investors access and allocate to this growing asset class
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