April’s tariff-driven volatility served as the first meaningful stress test for the collateralized loan obligation (CLO) ETF market. While the asset class generally passed its first test, the experience revealed a notable dispersion in fund performance. Indeed, differences in credit quality, liquidity management—i.e., minimizing bid/ask costs on underlying asset sales and the implicit costs of in-kind redemptions—and variable fees shaped the experience for end investors. Furthermore, traditional ETF liquidity metrics, such as daily trading volume, failed to capture the true cost of liquidity over the volatile stretch. Instead, given the active nature of CLO ETFs, share price fluctuations provided a more accurate indication of liquidity costs over this specific time period.
Heading into April, managers who avoided the temptation to chase yield amid tight spreads and maintained more conservative portfolios fared much better during the “stress test.” These portfolios generally experienced less volatility, narrower discounts to NAV, and stronger total returns during the worst of April’s drawdown. While the episode was short-lived, the dispersion in performance lends further credence to the idea that not all CLO ETFs are created equal.
The Intersection of ETF Flows and Overall CLO Market Depth
CLO ETFs experienced remarkable growth over the past two years amidst a combination of strong risk-adjusted performance, compelling yields, enhanced diversification, and improved investor access. Yet, CLO ETFs remain just a small portion of the overall CLO market, representing only about three percent of the total $1 trillion CLO market (Figure 1). Placing the CLO ETF market in context of the broader CLO sector provides background on the role that these assets typically play during periods of market turbulence.
Figure 1
CLO ETFs Remain Small Relative to the Overall CLO Market
Source: PGIM Fixed Income, Bloomberg. As of May 2025.
In instances where market volatility increases, trading volume in the secondary AAA CLO market also typically increases as investors turn to the asset class as a source of liquidity. CLO ETFs can play a similar role, offering investors access to a deep, underlying market when liquidity is needed. April’s tariff-driven selloff provided a real-time example as CLO ETF outflows hit a record $1.7 billion in a single week during the month, but with little impact on the broader, underlying market. Indeed, the broader CLO market easily absorbed the additional supply, with ETF flows comprising just about 8% of monthly trading and issuance volume (Figure 2).
Figure 2
ETF Flows Remain Relatively Small Compared to the Sector’s Total Trading Volume
Source: PGIM Fixed Income, Bloomberg. As of May 2025.
A Real-Time Stress Test
Prior to April’s tariff-related volatility, many CLO tranches were trading near local tights and credit curves remained flat (Figure 3). Even then, maintaining exposure to the highest-quality tranches—especially senior AAAs—proved beneficial as they outperformed on due to their compelling risk-adjusted profile.
Figure 3
AAA CLO Spreads Remained Resilient During April’s Stress Test
Source: PGIM Fixed Income, Bloomberg. As of May 2025. Look-back period for CLOs since 2012. Other sectors since 2002.
As tariff concerns rippled through the markets in April, credit spreads widened and credit curves steepened to varying degrees. The “April” column of Figure 3 shows the extent to which AAA CLO tranches outperformed lower-rated CLO tranches and other fixed income credit sectors on an excess return basis.
Figure 4
April’s performance shows how the extent of spread widening affected excess returns
Source: PGIM Fixed Income, Bloomberg. As of May 2025.
Given the minimal credit risk in AAA CLOs, the spread widening in this segment was largely technical as investors seeking liquidity turned to the asset class. However, junior AAAs underperformed both AAA and AA tranches, as ETF redemptions triggered disproportionate selling in these less liquid securities (see the Jr AAA row in Figure 3). Meanwhile, BBB CLOs faced dual pressures: technical selling from ETFs and rising credit concerns, reflecting their higher sensitivity to underlying loan quality. This divergence is evident from the empirical beta of each tranche relative to the underlying leveraged loans, with BBBs exhibiting a beta of 1.7x, nearly four times the sensitivity as the beta of 0.4x for AAAs since inception.
This divergence in performance across tranches translated into dispersion among CLO ETFs. Notably, the widening of bid/ask spreads prompted some ETF managers to introduce variable exit fees, either to offset execution uncertainty or to discourage outflows during volatile periods.
What’s in a Name?
Although CLO ETFs might appear homogenous, each fund manager expresses their view on market opportunities differently. As previously highlighted, while the name of a CLO ETF may indicate a focus on AAA or BBB assets, portfolios of similarly named CLO ETFs can vary widely, highlighting the need for thorough analysis of the portfolio’s holdings. For example, the fourth and fifth columns of Figure 5 reveal an unexpected amount of Jr AAAs and AAs within AAA-labeled ETFs. Figure 5 also reveals a meaningful difference in BBB ETF holdings.
Figure 5
Credit Quality Varies Meaningfully Across CLO ETF Portfolios (%)
Source: PGIM Fixed Income, Bloomberg. As of May 2025.
April’s stress test highlighted how similarly labeled CLO ETFs can differ in portfolio construction and how these differences can significantly affect performance during periods of volatility. The ETFs almost exclusively invested in AAA CLOs outperformed those that had reached down the ratings spectrum when spreads were far tighter than their long-term averages. Meanwhile, during April’s volatility, funds that adopted a more defensive approach experienced less downside risk, more stability, and less discrepancy between their share price and NAV (Figure 6).
While this post focuses on April’s performance, some managers consistently appear to reach down in credit quality in search of yield. Therefore, continued differentiation across ETFs is likely—importantly, including those within the same label category (e.g., AAAs or BBBs).
Figure 6
AAA CLO ETF Dispersion Increased Amid April’s Volatility
Source: Bloomberg as of May 2025. Days are Trading Days. Average Price-NAV difference is measured using absolute differences between mid-price and NAV.
April’s stress test showed that the appeal of AAA CLO ETFs lies in their ability to provide income, stability, and liquidity. The recent market volatility marked the first real test for many CLO ETFs since their inception. April’s dislocation revealed meaningful differences in performance driven by underlying credit quality and each manager’s ability to source liquidity. The stress-test experience also serves as another reminder that not all AAA CLO ETFs are created equal, nor are they managed equally (e.g., portfolio construction, skill in accessing market liquidity, and varying exit fees). These variations can lead to material dispersion in performance during bouts of market volatility—which is when it matters most.
The comments, opinions, and estimates contained herein are based on and/or derived from publicly available information from sources that PGIM Fixed Income believes to be reliable. We do not guarantee the accuracy of such sources or information. This outlook, which is for informational purposes only, sets forth our views as of this date. The underlying assumptions and our views are subject to change. Past performance is not a guarantee or a reliable indicator of future results.
Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of May 2025.
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