Major asset managers are rolling out exchange-traded funds that purchase investment-grade portions of collateralized loan obligations, giving retail investors access to leveraged loan yields while avoiding private credit risks. Franklin Templeton, Barings, Fidelity Investments, and Janus Henderson have all launched CLO ETFs this year, targeting the safer tranches of these complex vehicles.

US CLO ETF inflows have reached $9 billion in 2024, up from $7 billion during the same period last year, as investors pull roughly $20 billion from business development companies. The shift reflects concerns about private credit defaults and liquidity constraints. These funds let investors trade corporate debt on public exchanges while capturing elevated yields from leveraged loans backed by hundreds of corporate borrowers.

CLO structures protect senior investors because equity tranches absorb losses first, typically facing leverage of around 10 times. This setup appeals to investors seeking risk-adjusted returns amid persistent inflation and high borrowing costs that strain heavily-leveraged companies. Pimco recently warned that the credit loss cycle has begun, predicting higher losses in lower-quality credit.

Issuance of broadly syndicated CLOs has dropped to $58 billion from $89 billion year-over-year, but strong ETF demand could revive new deals in the second half. The BBB-rated mezzanine segment is gaining traction, signaling improved investor sentiment toward riskier credit assets.