High Yielding Assets for Investors to Diversify Their Portfolios

Investors are still drawn to collateralized loan obligations (CLOs), which continue to offer attractive yields even as interest rates remain high. According to data from State Street, about $4.7 trillion has flowed into CLO and bank loan exchange-traded funds (ETFs) since the start of 2025.

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This follows last year’s record inflow of $25.6 billion. Although these funds saw outflows in April, investor interest rebounded strongly in May, bringing in $2 trillion in new capital — making it the ninth-best month on record for these funds, State Street analyst Matthew Bartolini noted.

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CLOs are collections of floating-rate loans made to businesses. The interest payments they generate adjust with short-term rates, which makes them appealing during times of elevated or fluctuating rates. Bartolini said in a note on May 31 that because of the floating-rate nature of CLOs and the Federal Reserve’s cautious stance on cutting rates, these investments are likely to continue attracting strong inflows.

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The Fed is scheduled to meet again on June 17-18 and is expected to maintain current interest rates, which it has done all year. Many market participants anticipate a rate cut in September, based on data from the CME FedWatch Tool. Once rate cuts begin, returns from CLOs will likely decline gradually.

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Himani Trivedi, head of structured credit at Nuveen, said demand for CLOs has remained consistent across the capital structure. She expects that trend to persist. “There just aren’t that many floating-rate instruments available,” she explained, emphasizing that CLOs serve as a strong diversification tool in investor portfolios. Even with market volatility and expectations of prolonged higher rates, the demand for CLOs remains steady.

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One example is the Janus Henderson AAA CLO ETF (ticker: JAAA), which currently has a 30-day SEC yield of 5.48% and an expense ratio of 0.20%. It has nearly $21 billion in assets under management and has attracted around $4 billion in new inflows so far this year, per FactSet. John Kerschner, head of U.S. securitized products at Janus and a portfolio manager, noted that investors benefit from solid returns without taking on excessive risk.

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He added that during recent market disruptions, CLOs demonstrated relatively low volatility compared to other types of bonds, including corporate credit. Liquidity, he emphasized, was robust.

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“When markets got rough, liquidity didn’t vanish — it actually improved,” Kerschner said. “More trading activity is a good sign for investors.”

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For those seeking higher yields, investing in lower-rated CLO tranches offers additional return potential. For instance, AAA-rated CLOs are the safest in terms of repayment priority if a borrower defaults, but moving down to AA- or BBB-rated instruments provides a “spread pickup,” or extra yield. Nuveen launched its AA-BBB CLO ETF (NCLO) in December. This ETF currently yields 6.4% and carries a 0.25% expense ratio. Despite being a newer product, it has brought in $19 million in flows so far this year and manages $89.4 million in total assets.

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Trivedi pointed out that although the ETF holds CLOs rated below AAA, they are still considered investment grade — meaning they are less likely to default. She added that strong credit fundamentals have helped keep CLO defaults low.

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The additional income, or “carry,” for these tranches is about 200 basis points above the Secured Overnight Financing Rate (SOFR), which is the benchmark used for pricing CLOs. Even if SOFR declines, this spread offers a return advantage over other fixed-income instruments, she said.

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A recent analysis by VanEck supports the appeal of lower-rated CLOs. Over the past ten years, A-rated CLOs outperformed AAA-rated ones by 142 basis points annually, and also showed less volatility than investment-grade corporate bonds. BBB-rated CLOs delivered 147 basis points more than AAAs. VanEck launched its own AA-BBB CLO ETF (CLOB) last September. This ETF, which targets AA to BB-rated tranches, boasts a 7.17% yield and a 0.45% expense ratio, managing $116.39 million in assets.

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Janus Henderson also offers a lower-rated CLO ETF, the B-BBB CLO ETF (JBBB), which debuted in 2022. It has $1.33 billion in assets under management but has seen $62 million in outflows year to date.

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Despite their strong returns, CLOs should be one part of a diversified income portfolio. When the Fed eventually begins to cut rates, yields from CLOs will decline. Experts suggest combining them with longer-duration bonds. Kerschner recommends a “barbell” strategy using AAA CLOs on one end and long-duration mortgage-backed securities on the other. For example, the Janus Henderson Mortgage-Backed Securities ETF (JMBS) has a 7-year duration and a 5.11% yield.

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Nuveen also sees CLOs as valuable portfolio diversifiers due to their low correlation with other fixed-income assets. They can serve various roles, from replacing short-duration bonds to complementing high-yield holdings.

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Ultimately, the choice between higher- and lower-rated CLOs depends on an investor’s time horizon. AAA CLOs are more appropriate for short-term cash management, while AA to BBB-rated instruments can serve as core long-term holdings. “They offer stable income whether rates rise or fall,” Trivedi concluded. “It’s a very secure space to be in.”

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