Skip to main content
PGIM LogoPGIM Logo
    • Mégatendances
    • Les meilleures idées de l’année
    • Série OutFront
    • Recherche de portefeuille
    • Perspectives trimestrielles du marché
    • Série « Point de vue »
    • Événements du marché
    • Leadership éclairé
    • Événements et webinaires
    • Bibliothèque vidéo
    • Podcasts
    • Investir dans des alternatives
    • Gestion des risques
    • Investissement ESG
    • Investir dans les marchés émergents
  • Alternatives

    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)

    Actions et titres à revenu fixe

    • PGIM Fixed Income
    • Jennison Associates

    Solutions

    • PGIM DC Solutions
    • PGIM Multi-Asset Solutions
    • PGIM Quantitative Solutions

    Distribution intermédiaire

    • PGIM Investments
    • Nos clients
    • Contributions définies
    • Conseillers financiers
    • Relations institutionnelles
    • Emplacements dans le monde
    • Contactez-nous
    • Aperçu
    • Leadership
    • Historique
    • Nos activités
    • Diversité, équité et inclusion
    • Emplacements dans le monde
    • Contactez-nous
    • Abonnement à la newsletter
    • Demander des informations
    • Carrières chez PGIM
    • Opportunités d’emploi
    • Toutes les actualités
    • Communiqué de presse
    • Dans l’actualité
    • Faits et chiffres
    • Contacts avec les médias
Annual Best Ideas

Not All AAA CLO ETFs Are Created EqualNotAllAAACLOETFsAreCreatedEqual

16 janv. 2025

  • Download PDF
Partager
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
  • Print

Partager

While the $1 trillion CLO market has been around for decades, CLO ETFs are fairly new. Previously only available to large institutional investors, the growing CLO ETF market democratizes the investment strategy for retail investors. CLOs have historically provided a combination of attractive spreads, yields, and strong credit profiles. Now, the small but fast-growing CLO ETF segment is garnering increased attention from investors seeking floating rate assets with a strong excess return profile. Actively managed AAA CLO ETFs provide access to the highest-rated tranche in the CLO capital structure, which delivers a sizable yield boost over other fixed income investments of similar credit quality.

However, actively managed ETFs are showing notable dispersion in positioning with some managers more willing than others to reach down in credit quality or move into middle market loans in their search for yield. As a result, not all AAA CLO ETFs are created equally, potentially leading to a wide dispersion in performance—especially during a down-market cycle.

Even as the global monetary tightening cycle appears to be in its last throes, the potential of a higher-for-longer rate environment continues to drive investors’ interest in floating-rate assets. Particularly, retail investors are now just gaining access to the asset class given the advent of CLO ETFs. As such, CLO ETF assets under management have seen a nearly five-fold increase since 2023 to more than $15 billion as institutional and retail investors search for high-quality yield and portfolio diversification.

While AAA CLOs, specifically, benefit from strong structural protections and historically low defaults, they also can offer comparatively high yields. When plotted relative to their credit ratings, spreads on high-quality CLOs stand out as they offer some of the highest spreads of any high-grade credit investments (Figure 1).

Figure 1: AAA CLOs Offer Attractive Yields Relative to Alternatives (SOFR Spread (bps))

 

Source: PGIM Fixed Income as of October 2024.

A CLO Refresher and Nuance

As a refresher, CLOs are actively managed investment pools of senior secured broadly syndicated loans (BSLs) or middle market leveraged loans. Each CLO is structured as a series of tranches rated from highest to lowest given the percentage of subordination and income stream.

Senior AAA tranches are the most senior, risk remote tranche in the CLO capital structure. The credit enhancement and structural protections of the senior AAA tranches grants them the first claim on cash flows. They also benefit from the credit support of other tranches as realized losses are first absorbed by all tranches subordinate to the senior AAA tranche. In addition to having a priority on cash distributions, AAA tranches have an additional structural enhancement due to performance tests meant to identify and cure any deterioration in the underlying collateral. If tests are tripped, a CLO manager would divert cash flows from equity and then the lowest debt tranches to pay down the senior-most tranches. The combination of strong structural protections and their seniority in the capital structure has resulted in zero AAA losses through their long history.1

Importantly, not all AAAs benefit from being the senior-most tranche. Recently, the market has seen an increasing number of “Junior AAA” tranches. While we believe these tranches are still risk remote, it is important to appreciate that these tranches are not “first-pay” securities and, thus, do not benefit from the amortization protection when triggers are initially tripped. Thus, we observe these securities to behave much more akin to other “second-pay” securities—AA CLOs.

Credit Quality Can Vary

Unlike passive investments that mirror benchmarks, CLO ETFs are all actively managed and differ meaningfully across managers. Even at the AAA space, some managers may choose to reach further down the credit ratings spectrum in exchange for a slight pickup in yield. Others choose to limit the portfolio only to AAA-rated assets. While AAA CLO ETFs may at first appear homogeneous, the composition and credit quality of the underlying portfolios can be vastly different, with junior AAA and even AA tranches comprising a sizeable portion of some portfolios (Figure 2).

Figure 2: Credit quality varies meaningfully across AAA CLO ETF portfolios

Source: JP Morgan, Bloomberg, PGIM Fixed Income as of October 2024. For illustrative purposes only.

CLO ETFs largely fall into one of two buckets—the “AAA” and the “BBB” funds. These broad-brush categories do not necessarily correlate directly to the ratings of the underlying assets. While a CLO ETF may claim to be AAA CLO ETF, some have a higher percentage of non-AAA tranches than others. But nuances exist even within the AAA category, which can be split into “senior” first-pay tranches and “junior” second-pay tranches. Although both receive a AAA rating, the market sensitivity (i.e. beta) and risk-adjusted returns can vary meaningfully. While both are loss remote, “junior” second-pay AAA tranches have been observed to behave more like AA CLOs during times of market stress, such as those experienced during the heights of the COVID crisis.

Even “small” differences in the underlying credit quality of a CLO ETF can have a meaningful impact on the portfolio’s performance—particularly during times of market stress. Given the potential decrease in relative liquidity, we don’t believe investors are adequately being compensated by the marginal pickup in spread offered by “junior” second-pay AAA tranches.

Putting it all together, while SEC 30-day yields across CLO ETFs would suggest portfolio construction is similar, the positioning (Figure 2) shows how different the risk profiles are. Credit curves are very flat, and differences in ETF fees may offset any additional marginal spread from riskier portfolio positioning.

While AAA CLOs may appear homogeneous, credit quality can vary significantly. With some managers more willing to reach down the credit ratings spectrum, increased differentiation across ETFs is likely, with investment managers possessing strong research and credit capabilities best positioned to capture relative value opportunities. This creates the possibility of a wide dispersion of results—especially during times of limited market liquidity or economic stress.

1. S&P Global. (2023, May 26). Default, Transition, and Recovery: 2022 Annual Global Leveraged Loan CLO Default and Rating Transition Study. Accessed November 2024.

Visit Website
PGIM Fixed Income

A provider of global fixed income solutions.

Visit Website

En savoir plus
Alpha Opportunities Beyond the Macro Volatility

PGIM’s Best Ideas highlight a host of areas where we believe investors will find promising opportunities.

En savoir plus

Explore more ideas

Compelling Opportunities in Industrial Markets on the U.S./Mexico Border
Annual Best Ideas

Compelling Opportunities in Industrial Markets on the U.S./Mexico Border

16 janv. 2025

The growth in border industrial demand is occurring alongside heightened uncertainty about U.S. trade policy that is unlikely to fade soon.

Enhancing Diversification Through Non-Sponsored Direct Lending
Annual Best Ideas

Enhancing Diversification Through Non-Sponsored Direct Lending

16 janv. 2025

A diversified portfolio of sponsored and non-sponsored loans can provide investors with a broader range of deals and potentially better performance over time.

Unlocking Liquidity: The Distribution Edge of Lower Mid-market Private Equity
Annual Best Ideas

Unlocking Liquidity: The Distribution Edge of Lower Mid-market Private Equity

16 janv. 2025

The era of private equity flourishing under low interest rates, followed by a blend of optimism after the COVID-19 pandemic, has shifted.

Artificial Intelligence: An Accelerating Revolution
Annual Best Ideas

Artificial Intelligence: An Accelerating Revolution

16 janv. 2025

Today, the revolutionary impact of AI-driven change is becoming evident in most industries and is accelerating.

Navigating the Nexus: The Intersection of Insurance and Private Markets
Annual Best Ideas

Navigating the Nexus: The Intersection of Insurance and Private Markets

16 janv. 2025

The maturation of private markets has led to profound change across the global investment landscape.

Uncovering Opportunities Across Emerging Markets
Annual Best Ideas

Uncovering Opportunities Across Emerging Markets

16 janv. 2025

Investors have historically favored emerging markets for their high growth potential, relative inefficiency and diversification benefits.

Rethinking ‘Safe’ Withdrawal Rates
Annual Best Ideas

Rethinking ‘Safe’ Withdrawal Rates

16 janv. 2025

Perspectives on portfolio withdrawal rates by integrating spending flexibility and an outcomes metric that better captures the anticipated retiree sentiment.

Important Information

For Professional Investors Only. Past performance is no guarantee or reliable indicator of future results. All investments involve risk, including the possible loss of capital. These materials are for informational or educational purposes only. 

PGIM Fixed Income operates primarily through PGIM, Inc., a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended, and a Prudential Financial, Inc. (“PFI”) company. Registration as a registered investment adviser does not imply a certain level or skill or training. PGIM Fixed Income is headquartered in Newark, New Jersey and also includes the following businesses globally: (i) the public fixed income unit within PGIM Limited, located in London; (ii) PGIM Netherlands B.V., located in Amsterdam; (iii) PGIM Japan Co., Ltd. (“PGIM Japan”), located in Tokyo; (iv) the public fixed income unit within PGIM (Hong Kong) Ltd. located in Hong Kong; and (v) the public fixed income unit within PGIM (Singapore) Pte. Ltd., located in Singapore (“PGIM Singapore”). PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. Prudential, PGIM, their respective logos, and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing or investing assets. In providing these materials, PGIM is not acting as your fiduciary. PGIM Fixed Income as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Investors seeking information regarding their particular investment needs should contact their own financial professional.

These materials represent the views and opinions of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Distribution of this information to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of PGIM Fixed Income is prohibited. Certain information contained herein has been obtained from sources that PGIM Fixed Income believes to be reliable as of the date presented; however, PGIM Fixed Income cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. PGIM Fixed Income has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.

Any forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fee. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. PGIM Fixed Income and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of PGIM Fixed Income or its affiliates.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government agency or private guarantor, there is no assurance that the guarantor will meet its obligations. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. Diversification does not ensure against loss.

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR.PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V., an entity authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited including those available under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).   In Switzerland, information is issued by PGIM Limited, London, through its Representative Office in Zurich with registered office: Kappelergasse 14, CH-8001 Zurich, Switzerland. PGIM Limited, London, Representative Office in Zurich is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA and these materials are issued to persons who are professional or institutional clients within the meaning of Art.4 para 3 and 4 FinSA in Switzerland.  In certain countries in Asia-Pacific, information is presented by PGIM (Singapore) Pte. Ltd., a regulated entity with the Monetary Authority of Singapore under a Capital Markets Services License to conduct fund management and an exempt financial adviser.  In Japan, information is presented by PGIM Japan Co. Ltd., registered investment adviser with the Japanese Financial Services Agency. In South Korea, information is presented by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean investors. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap.571). In Australia, this information is presented by PGIM (Australia) Pty Ltd (“PGIM Australia”) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). PGIM Australia is a representative of PGIM Limited, which is exempt from the requirement to hold an Australian Financial Services License under the Australian Corporations Act 2001 in respect of financial services. PGIM Limited is exempt by virtue of its regulation by the FCA (Reg: 193418) under the laws of the United Kingdom and the application of ASIC Class Order 03/1099. The laws of the United Kingdom differ from Australian laws. In Canada, pursuant to the international adviser registration exemption in National Instrument 31-103, PGIM, Inc. is informing you that: (1) PGIM, Inc. is not registered in Canada and is advising you in reliance upon an exemption from the adviser registration requirement under National Instrument 31-103; (2) PGIM, Inc.’s jurisdiction of residence is New Jersey, U.S.A.; (3) there may be difficulty enforcing legal rights against PGIM, Inc. because it is resident outside of Canada and all or substantially all of its assets may be situated outside of Canada; and (4) the name and address of the agent for service of process of PGIM, Inc. in the applicable Provinces of Canada are as follows: in Québec: Borden Ladner Gervais LLP, 1000 de La Gauchetière Street West, Suite 900 Montréal, QC H3B 5H4; in British Columbia: Borden Ladner Gervais LLP, 1200 Waterfront Centre, 200 Burrard Street, Vancouver, BC V7X 1T2; in Ontario: Borden Ladner Gervais LLP, 22 Adelaide Street West, Suite 3400, Toronto, ON M5H 4E3; in Nova Scotia: Cox & Palmer, Q.C., 1100 Purdy’s Wharf Tower One, 1959 Upper Water Street, P.O. Box 2380 -Stn Central RPO, Halifax, NS B3J 3E5; in Alberta: Borden Ladner Gervais LLP, 530 Third Avenue S.W., Calgary, AB T2P R3.

Collapse section
  • Perspectives

    • Mégatendances
    • Les meilleures idées de l’année
    • Série OutFront
    • Recherche de portefeuille
    • Perspectives trimestrielles du marché
    • Événements du marché
    • Leadership éclairé
    • Événements et webinaires
    • Bibliothèque vidéo
    • Podcasts
  • Investment Themes

    • Investissement ESG
    • Investir dans des alternatives
    • Investir dans les marchés émergents
    • Gestion des risques
  • Nos activités

    • PGIM DC Solutions
    • PGIM Fixed Income
    • PGIM Investments
    • PGIM Multi-Asset Solutions
    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)
    • PGIM Quantitative Solutions
    • Jennison Associates
  • Clients

    • Nos clients
    • Contributions définies
    • Conseillers financiers
    • Relations institutionnelles
  • À propos de nous

    • Aperçu
    • Leadership
    • Historique
    • Diversité, équité et inclusion
    • Emplacements dans le monde
    • Contactez-nous
    • Abonnement à la newsletter
    • Demander des informations
  • Carrières

    • Carrières chez PGIM
    • Opportunités d’emploi
  • Salle de presse

    • Toutes les actualités
    • Communiqué de presse
    • Dans l’actualité
    • Faits et chiffres
    • Contacts avec les médias
PGIM Logo
  • Conditions générales
  • Centre de confidentialité
  • Aide à l’accessibilité (en anglais)
  • Informations réglementaires au Royaume-Uni
  • Informations réglementaires des Pays-Bas
  • Centre de préférences pour les cookies

Réservé aux investisseurs professionnels. Tous les investissements comportent des risques, y compris la perte éventuelle du capital.

Ce contenu est uniquement destiné à des fins d’information et d’éducation et ne doit pas être interprété comme un conseil en investissement ou une offre ou une sollicitation concernant tout produit ou service à toute personne à qui il est interdit de recevoir de telles informations en vertu des lois applicables à son lieu de citoyenneté, de domicile ou de résidence. PGIM est la principale activité de gestion d’actifs de Prudential Financial, Inc. et un nom commercial de PGIM, Inc. et de ses filiales mondiales. PGIM, Inc. est un conseiller en investissement enregistré auprès de la Securities and Exchange Commission (« SEC ») des États-Unis. L’enregistrement auprès de la SEC n’implique pas un certain niveau de compétence ou de formation.

Les informations contenues dans ce site web ne constituent pas des conseils en matière d’investissement ni une recommandation concernant la gestion ou l’investissement de votre épargne-retraite. PGIM, Inc. et ses filiales n’agissent pas en tant que fiduciaire en mettant à votre disposition les informations contenues dans ce site Web.

Au Royaume-Uni, les informations sont émises par PGIM Limited, dont le siège social est situé : Grand Buildings, 1-3 Strand, Trafalgar Square, Londres, WC2N 5HR. PGIM Limited est autorisé et réglementé par la Financial Conduct Authority (« FCA ») du Royaume-Uni (numéro de référence de la société 193418). Dans l’Espace économique européen (« EEE »), les informations sont émises par PGIM Netherlands B.V., dont le siège social est situé : Gustav Mahlerlaan 1212, 1081 LA Amsterdam, Pays-Bas. PGIM Netherlands B.V. est agréée par l’Autoriteit Financiële Markten (« AFM ») aux Pays-Bas (numéro d’enregistrement 15003620) et opère sur la base d’un passeport européen. Dans certains pays de l’EEE, les informations sont, le cas échéant, présentées par PGIM Limited sur la base de dispositions, d’exemptions ou de licences dont PGIM Limited dispose en vertu d’accords d’autorisation temporaires à la suite de la sortie du Royaume-Uni de l’Union européenne. Ces documents sont émis par PGIM Limited et/ou PGIM Netherlands B.V. à l’intention des personnes qui sont des clients professionnels au sens des règles de la FCA et/ou des personnes qui sont des clients professionnels au sens de la mise en œuvre locale pertinente de la directive 2014/65/UE (MiFID II). En Italie, les informations sont fournies par PGIM Limited, autorisée à opérer en Italie par la Commissione Nazionale per le Società e la Borsa (CONSOB).

Au Japon, les informations sont fournies par PGIM Japan Co., Ltd. (« PGIM Japon ») et/ou PGIM Real Estate (Japon) Ltd. (« PGIMREJ »). PGIM Japan, un opérateur commercial d’instruments financiers enregistré auprès de l’Agence des services financiers du Japon, propose divers services de gestion d’investissements au Japon. PGIMREJ est un gestionnaire d’actifs immobiliers japonais enregistré auprès du Kanto Local Finance Bureau du Japon.

À Hong Kong, les informations sont fournies par PGIM (Hong Kong) Limited, une entité réglementée par la Securities & Futures Commission de Hong Kong, aux investisseurs professionnels tels que définis dans la section 1 de la partie 1 de l’annexe 1 de la Securities and Futures Ordinance (Cap. 571). À Singapour, les informations sont émises par PGIM (Singapour) Pte. Ltd. (« PGIM Singapour »), une entité réglementée par l’Autorité monétaire de Singapour en vertu d’une licence de services de marchés financiers pour la gestion de fonds et un conseiller financier indépendant. Ces documents sont publiés par PGIM Singapour pour l’information générale des « investisseurs institutionnels » conformément à la section 304 du Securities and Futures Act 2001 de Singapour (le « SFA ») et des « investisseurs accrédités » et autres personnes concernées conformément aux conditions spécifiées dans la section 305 du SFA. En Corée du Sud, les informations sont émises par PGIM, Inc. qui est autorisé à fournir des services de gestion d’investissement discrétionnaire directement aux investisseurs institutionnels qualifiés sud-coréens sur une base transfrontalière.

Prudential Financial, Inc. (« PFI ») des États-Unis n’est affiliée d’aucune manière à Prudential plc, constituée au Royaume-Uni ou à Prudential Assurance Company, une filiale de M&G plc, constituée au Royaume-Uni.

You are viewing this page in preview mode.

Edit Page