Panagram BBB-B CLO ETF

CLOZ

Market cap $858M

CLOZ is an ETF that works with BBB CLO tranches, high yielding. Together with JBBB, it has become a very popular solution with spread tightening: stable prices and higher yields than AAA tranches. But CLOZ has a higher spread duration than solutions based on AAA tranches; therefore, greater risk of contraction in case of spread widening.

Eldridge BBB-B CLO ETF offers an 8% yield and monthly payouts, making it attractive for income-focused, conservative investors seeking capital preservation. CLOZ's portfolio emphasizes floating-rate CLOs rated BBB to B, with a strong track record of low historical defaults and broad industry diversification. While CLOZ outperformed peer CLO ETFs in total return and price, its returns are primarily from income, not capital appreciation, and may decline if rates fall.

The investment case for closed-end funds (CEFs) is weak now due to tight discounts, high leverage costs, and expensive underlying assets. Most CEFs do not deliver sustainable alpha, and lower-fee actively managed ETFs now offer similar exposures with better economics. We have reduced our CEF allocation, favoring alternatives like BDCs, select ETFs, preferreds, and bonds for better value and risk/reward.

CLO ETFs have higher yields, lower risk and volatility, than most other types of fixed-income ETFs. Performance has been exceedingly strong for years, albeit a bit weaker since the Fed cut rates last year. There are CLO ETFs with different risk-return profiles, some appropriate for more risk-averse investors, some for more aggressive ones.

CLOs have been one of the best-performing income asset classes of these past few years, as has CLOZ. Due to the fund's strong investment thesis and popularity, I thought to compare it with USHY, a simple high-yield bond ETF. CLOZ has a higher yield, stronger past returns, and lower risk and volatility.

CLOZ offers exposure to BB and BBB CLO tranches, blending investment-grade and high-yield risk for a 7.7% SEC yield and floating rate income. Current CLO spreads are historically tight, making the risk/reward unattractive; a significant drawdown is possible if spreads widen to past levels. Recent management changes add uncertainty, as the fund lost an experienced manager, and new leadership's performance in stressed markets is unproven.

Fixed income investors who want to diversify their portfolios in a challenging market environment shouldn't overlook CLOs. Danielle Gilbert, managing director at Eldridge Capital Management, discussed the value of CLOs in investment portfolios with VettaFi's Todd Rosenbluth in the recent Income Investment Strategy Symposium.

Fixed income investors who want to diversify their portfolios in a challenging market environment shouldn't overlook CLOs. Danielle Gilbert, managing director at Eldridge Capital Management, discussed the value of CLOs in investment portfolios with VettaFi's Todd Rosenbluth in the recent Income Investment Strategy Symposium.

Advisors don't want to take on much interest rate risk. But many are willing to take on some credit risk.

Rising tariff turmoil has sparked a run from credit-sensitive instruments, with escalating trade tensions threatening economic stability. Wednesday's GDP print stoked recessionary fears when it showed the U.S. economy contracted for the first time since early 2022.