ETF Senior loans and CLOs: High income potential and low duration exposure

Scott Baskind
Taylor Watts
and
September 17, 2025
Man climbing a mountain with a grapple hook

Key takeaways

  • High income with low duration:

    Senior loans and CLOs offer floating-rate income and minimal duration risk, which are attractive in today’s interest rate environment.

  • BKLN vs. ICLO strategy:

    Both ETFs seek high relative risk-adjusted returns but at different risk bands. ICLO aims for less risk and more stability, while BKLN has added income potential.

  • Resilience in downturns:

    Senior loans have lower levels of default and greater recovery rates than high yield, while CLO AAAs have never experienced a principal impairment.

Senior loan exposure, either directly or through collateralized loan obligations (CLOs), can make sense for investors looking for risk-adjusted income with low duration. Invesco has two exchange-traded funds (ETFs) that invest in the broader asset classes. While they both seek to provide high income, their underlying composition and risk profiles are different. Invesco Senior Loan ETF (BKLN) invests in the largest senior loans, while Invesco AAA CLO Floating Rate Note ETF (ICLO) invests primarily in the highest rated CLO tranche, AAA. So, how to choose between the two?

Senior loan and CLO need-to-knows

Senior loans, also known as leveraged loans or bank loans, are debt securities utilized by companies to finance their operations, support business expansion, and refinance existing debt. They’re senior because of their uppermost position in a company's capital structure, meaning they’re the highest priority to be repaid in a default. Senior loans are typically secured by the borrower's assets, such as cash, receivables, inventory, or property, and are structured as floating-rate instruments, which means the interest paid on these loans fluctuates with interest rate changes.

CLOs are backed by a pool of senior loans and have various coverage, collateral, and quality tests that manage them. They buy the underlying senior loans by issuing different debt/equity slices with different cashflow priorities. The most senior of these slices are AAA-rated and first in line for cash flow coming into the CLO.

BKLN versus ICLO: Key features

While both ETFs offer income and floating rate exposure, in general, consider BKLN for investors seeking higher yield who are comfortable with greater credit risk. ICLO makes sense for investors focused more on capital preservation, relatively lower volatility, and high credit quality. It can offer greater stability and lower credit risk and has historically still delivered high relative yields.

Feature

BKLN

ICLO

Asset class

Broadly syndicated bank loans

Collateralized loan obligations (CLOs)

Invests in

Senior secured loans issued to below-investment grade companies

Securitized product backed by broadly syndicated loans broken up into rated tranches

Strategy

Allocation to the 100 largest senior loans

Allocation to predominantly AAA CLO notes (senior-most tranche)

Management style

Passive: Index-based, tracks the Morningstar LSTA US Leveraged Loan 100 Index. Rebalanced bi-annually

Active: CLO tranches chosen based on credit quality and market conditions

Risk profile

Higher credit risk due to exposure to below investment-grade loans; subject to liquidity, valuation, and reinvestment risks

Lower credit risk due to investment primarily in AAA-rated CLOs; exposed to CLO-specific risks, including trading, technical, and collateral performance

Historical defaults

Historical default loss of ~1%

No history of default loss

Coupon type

Floating rate

Floating rate

Broad asset class 10-year correlation to Bloomberg US Aggregate Bond Index, as of June 30, 2025.

0.19

0.21

Broad asset class 10-year volatility

4.89

2.26

Broad asset class 10-year Sharpe Ratio

0.60

0.71

Why consider BKLN and ICLO?

A combination of characteristics may position senior loans and AAA CLO investments as a core holding in any environment.

  • High current income potential: Base interest rates, while declining, are expected to stay relatively higher for longer, and credit spreads, which continue to remain close to longer-term averages, contribute to current income. The coupon income for bank loans and CLO AAAs today is 7.85% and 5.66% respectively, well above the long-term average.1 Even if the Federal Reserve (Fed) cuts interest rates in the near term, market expectations are for cuts to be relatively shallow and for coupon rates to still be higher for longer, and remain well above pre-2022 levels.2
  • Limited impact from rate volatility: Senior loans and CLO investments carry minimal duration risk, with an average duration of less than 90 days. While the market consensus is for rates to decline, the timing and amount of rate cuts remain unclear. Senior loans and CLO investments can be attractive in this environment. Their average pricing isn’t impacted by changes in the market perception of the timing or amount of rate cuts, compared to longer duration asset classes that could see performance increases or drawdowns based on it, which ultimately increase volatility.
  • Compelling relative value: Currently, senior loan and CLO AAA spreads are tightening, but they’re still wide of similarly rated asset classes.3 That’s why we believe now is an attractive entry point for loans.
  • Resilience during downturns: Both ETFs offer downside mitigation. The floating rate characteristic of senior loans and CLO AAAs, coupled with their secured nature and priority in the capital structure, have made them resilient during market downturns. Plus, CLO AAAs, sitting at the top of the seniority level, have never experienced principal impairment.4 

Making a choice

Since both BKLN and ICLO provide senior loan exposure, directly or through a CLO structure, which to choose will largely depend on the investor’s risk tolerance and income needs.

  • All data from Bloomberg as of June 30, 2025 unless otherwise stated.
  • 1

    Bloomberg L.P., as of June 30, 2025. The S&P/LSTA Leveraged Loan Index is used to represent bank loans and is a market-weighted benchmark that tracks the performance of U.S. institutional leveraged loans—senior secured loans made to companies with below-investment-grade credit ratings. It reflects the price movements and returns of the 100 largest and most liquid loans in this market. The J.P. Morgan Collateralized Loan Obligation AAA Index is used to represent AAA CLO and is an index that measures the performance of AAA-rated tranches of U.S. dollar-denominated collateralized loan obligations (CLOs). These CLOs are backed by broadly syndicated leveraged loans and represent the most senior, lowest-risk portion of the CLO capital structure. Past performance is not a guarantee of future results.  
  • 2

    Source: Bloomberg L.P., as of June 30, 2025.
  • 3

    Source: BofA Global Research, Markit, ICE Data Indexes, LLC, S&P UBS Leveraged Loan Index, as of 7/31/25, Basis points (bps) spread levels: AAA US CLO of 118 bps, S&P UBS Leveraged Loan Index of 393 bps, ICE BofA US Corporate Index of 82 bps, and ICE BofA US HY Index of 294 bps. AAA CLOs are represented by a Markit index tracking AAA-rated tranches of US collateralized loan obligations. Senior loans are represented by the S&P UBS Leveraged Loan Index, which measures the market-value weighted performance of the investable universe of leveraged loans. Investment grade corporate bonds are represented by the ICE BofA US Corporate Index, a benchmark tracking US dollar-denominated investment grade corporate debt. High yield corporate bonds are represented by the ICE BofA US High Yield Index, which tracks the performance of US dollar-denominated high yield corporate debt.
  • 4

    Source: Moody’s Ratings, “Structured Finance: Impairment and loss rates of global CLOs: 1993-2024,” as of June 2025. 

Related insights