Collateralized loan obligations may become the next big push in the exchange-traded fund industry, as investors look for alternatives amid persistent uncertainty about interest rates. VettaFi’s Todd Rosenbluth suggests there is growing demand for these assets.
“[CLOs have] been popular within the marketplace,” the firm’s head of research told CNBC’s “ETF Edge” this week.
These instruments are short-term fixed income strategies. They consist of pools of floating-rate secured loans. The design is intended to deliver relative stability and attractive yields across different market cycles.
“We’ve seen fixed income ETF demand be quite strong,” Rosenbluth said. “I think that’s going to continue as we’re still waiting for some clarity from the next move of the Fed.”
Fed Rates and Demand
The Federal Reserve’s decision last month to keep rates unchanged serves as a catalyst for demand in short-term products, according to Rosenbluth. Investors are reacting to a monetary policy environment that remains in flux.
While the central bank holds steady, the market is adjusting. The industry is clearly noticing the interest that investors have in these vehicles. Rosenbluth listed Reckoner Capital Management, an ETF provider specializing in CLOs, as a firm actively creating new CLO ETFs this year.
“That’s caught our attention,” he said. “It’s just great to see the innovation that’s happening within the fixed income ETF marketplace.”
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Strategies for Asset Allocation
Jennifer Grancio, global head of distribution at TCW Group, is also observing a shift toward fixed income from the perspective of an asset manager.
“I think a lot of advisors are holding a core income-oriented portfolio and then dabbling a little bit with short duration or CLO products,” she said.
This trend suggests a tactical adjustment rather than a wholesale overhaul of investment strategies. Advisors seem to be using these products to manage duration risk while still seeking yield. If the central bank maintains its current stance for an extended period, this “dabbling” could evolve into a more permanent allocation strategy for many fixed income portfolios, as the search for yield without long-term exposure intensifies.
Structural Risks to Consider
However, Rosenbluth acknowledges risks associated with CLO ETFs. The safety of these investments depends heavily on the quality of the underlying tranches.
“While AAA-rated CLO tranches boast near-zero default rates, lower-tier tranches (BBB-B) face heightened default risk and market volatility during economic stress,” he wrote in a special note to CNBC.
Exposure is another concern. Because corporate loans in CLO pools carry significant exposure to tech and software sectors, issues in private credit or tech selloffs can spill over.
This volatility can trigger spread widening. He added that investors are therefore seeking AAA-rated and senior-secured assets to capture attractive yields without that long-term maturity risk.
