Janus Henderson’s JAAA Just Topped $30B. What’s Next For CLOs?

You know what they say: CLOs one door, and another opens.

One of the fastest-growing areas of the ETF industry is in collateralized loan obligations, strategies that hold below-investment-grade, floating-rate loans with varied levels of income and risk. Janus Henderson’s CLO ETF (JAAA), the largest fund in this category, recently surpassed $30 billion in AUM, according to the company. The milestone is the latest indicator of these funds’ ongoing popularity, but it’s not alone. In June, Pacer ETFs and Barings launched two funds focusing on CLOs and secured credit, and earlier this year, Fidelity brought two new active strategies to market. “With the growth of the CLO market and the way the ETFs trade, they’re able to take active strategies into the CLO space, which is kind of a whole new area for the wealth market,” Greg Stumm, CEO of American Beacon Partners, told ETF Upside in June.

Roadside CLO Assistance

Part of the recent demand stems from the Federal Reserve’s decision last month to hold interest rates steady, between 3.5% and 3.75%. There were some CLO outflows in December due to rate cuts, said John Kerschner, global head of securitized products at Janus Henderson. After that, people expected rates to continue falling, he said, which would make longer-duration products more attractive to investors. “Given that floating-rate products like AAA CLOs are almost no duration, that led to people allocating out,” he said. “What we like to tell investors is: ‘It’s very hard to have a view on rates that is consistently right, and it’s very hard to time the markets.’”

Still, launches in the CLO category have been surging since last year. Investors like them because of their downside protection and excess yield compared to corporate bonds, and now diversified CLO portfolios are possible because of the ETF wrapper. According to data from ETF Trends:

• Investment-grade CLO ETFs have 30-day yields in the 5%-6% range. 
• Although CLOs have been around for a long time, they’ve only been available as an ETF to individual investors since 2020 with Janus Henderson’s fund being one of the first launched in October of that year.

Inflation Nation: Another reason CLOs might make sense against the current macroeconomic backdrop is inflation. From the ongoing conflict in Iran spiking energy prices to friction in supply chains, inflation is only set to increase, and that makes a CLO fund valuable, Kerschner said. “The buildout of AI may be deflationary eventually, but it’s inflationary right now,” he added. “There are a lot of things pointing to structurally higher inflation.”