Panagram BBB-B CLO ETF

CLOZ

Market cap $667M

Collateralized loan obligations (CLOs) are securitized portfolios of corporate loans divided into tranches by risk profile. For many retail investors, CLOs can be foreign and uncomfortable, but the potential for attractive yields, floating-rate income, and diversification is strong.

Federal Reserve hikes are increasingly likely, with inflation increasing and unemployment stable. Lots of investments and ETFs should outperform during a period of rising rates. I'll be giving a quick rundown of four such ETFs in this article. Funds vary in risk, from cash ETFs to riskier choices, with the possibility of outstanding gains.

With Fed rates stabilizing, and the market turning hawkish, variable rate investments deserve another look. The Eldridge BBB-B CLO ETF (CLOZ) focuses on variable rate BBB-BB CLOs. It sports an above-average 7.0% dividend yield, and has outperformed most bonds on an absolute and risk-adjusted basis.

Eldridge BBB-B CLO ETF offers an 8% yield, but recent price declines reflect tighter credit spreads and market volatility. CLOZ's income relies on elevated interest rates; falling rates in 2026 could pressure distributions and necessitate payout cuts. The portfolio is diversified, with 62.6% in CLO BBB tranches and significant exposure to high-tech, banking, and healthcare sectors.

The Eldridge BBB-B CLO ETF offers attractive monthly income but faces declining distributions as SOFR rates fall. CLOZ primarily invests in mezzanine CLO tranches backed by senior secured loans, targeting moderate risk and capital preservation. Distributions are highly sensitive to SOFR; a 25 bps SOFR drop could reduce dividends by approximately 6%.

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.