Rush of New CLO ETF Launches Causes Concern About Market Overcrowding

The CLO exchange traded fund, or ETF, market has seen a substantial increase in the number of participating managers. With 30 separate funds now accounting for about $33 billion of assets globally, some CLO market participants are expressing concern about overcrowding, and questions about the performance outlook for these strategies are mounting in the face of looming Federal Reserve interest rate cuts.

Recent entrants include firms such as Crescent Capital, Reckoner Capital Management, State Street and Blackstone, with more watching and considering entering the sector. Some managers are wondering if the sector is approaching saturation in terms of managers that can successfully operate a CLO ETF.

Steve Page, managing director and structured credit trader at Barings, said that the substantial growth of the sector since 2022 has left little room for further new entrants.

“We’ve seen the market grow considerably since 2022, benefiting from higher rates and increased demand for floating rate products in general,” Page said. “We see about 30 different CLO ETFs currently with about $33 billion of AUM.”

Page added that he expects the trend in the sector to shift from new entrants to volume expansion among the existing ETF strategies in the coming months heading into 2026.

“ETFs hold about 4% of total U.S. CLO debt outstanding. That’s meaningful market share, but also suggests there is further room for growth,” Page said. “There’s a strong first-mover advantage to the ETF market. New players continue to enter, but gaining scale is challenging.

“The market’s AUM can continue to grow, but I don’t know how many more players it can accommodate and if it’s many more than the 30 to 35 out there now,” Page added.

John Kim, co-founder and CEO at Reckoner Capital Management, told Octus that while the field is getting much more crowded, certain managers will rise to the top, with each manager aiming to render the best yield.

“As the return profiles grow on current outstanding CLO ETFs, there will be some differentiation among the strategies people propose, and time will tell if one strategy emerges as being more convincing,” Kim said. “If you invest in a triple-A fund, your primary goal is principal protection, but you can get more yield going down the stack. Managers are trying to deliver best in class yield at the end of the day and time will tell.”

The competitive nature of the CLO ETF space is acute in the nascent European sector of the market, where a slate of recent new funds have launched with each hoping to become the European equivalent of Janus Henderson’s JAAA fund, which has become the market leader in the United States with almost $25 billion of assets.

BlackRock’s launch of its iShares European CLO UCITS ETF strategy earlier this year, which had a total expense ratio fee 10 bps lower than the previous market standard, triggered a significant number of its competitors to lower their fees as a result.

Reckoner’s Kim said that while the field is certainly getting more crowded, there remains space for more players, especially as part of a broader credit strategy at different firms.

“As time goes on, we believe more people will launch CLO ETFs in the U.S. and Europe because it’s a great calling card for alternative investors and money managers,” Kim said. “No one thinks ETFs are necessarily the best expression for CLO tranche investments, but they’re part of a necessary market structure.”

Kim noted that while the triple-A sector of the market has seen heavy inflows, other pockets of the CLO ETF market remain an attractive candidate for managers to lure retail investors into assets with strong risk adjusted returns.

“There’s been a lot of focus on triple-A CLOs, but that part of the ETF market is a little saturated right now,” Kim said. “As the market develops, people will realize they can go down to double-A, single-A, triple-B, and double-B.”

Kim added that investors will realize that the double-B level will offer attractive yields on a risk-adjusted basis as they become more educated on the product.

“Everyone in the institutional market knows the default risk on double-B CLOs has generally outperformed other credit assets with the same rating, and we think double-B CLOs possibly should be reclassified, based on long-term historical losses, so we think the risk adjusted yield in the mezzanine tranches is really convincing,” Kim said.

While the sector allows for strong risk adjusted yields, Page at Barings said the factors that have favored investments in CLO ETFS to date will likely not hold out forever, sending fund flows into more of a two-way street rather than the one-way flow that funds saw until April when tariff volatility struck the CLO ETF market for the first time.

“The CLO ETF story has been easy to tell since 2022 thanks to rising rates and attractive yields,” Page said. “Trading volumes and liquidity across triple-A CLOs have improved significantly over the past few years, a benefit for triple-A focused ETFs.”

Page added that bid-ask spreads are currently compressed but will widen out in times of volatility.

“As rates and/or rate expectations come down and the yield story becomes more nuanced for retail investors, I anticipate fund flows will turn more two-way,” Page said. “CLO ETF fund flows have been one way street since 2022 with the exception of brief pockets of volatility in March and April this year where we saw some outflows. The ETF model has yet to be tested in an environment where demand is curtailed by a sustained drop in rates.”

The volume of assets held in CLO ETFs has rapidly outgrown bank loan ETFs over the past two years. Janus Henderson’s JAAA fund alone was larger than the entire leveraged loan ETF market’s $19.8 billion in AUM as of early August, according to Morningstar data.

However, ETFs form only a small part of the loan fund universe outside of CLOs – the majority of assets is held by mutual funds since the long settlement times of loans pose a challenge for the daily liquidity required by an ETF.

CLO ETFs also offer exposure to investment-grade credit, unlike ETFs that directly invest in leveraged loans.

“CLO ETF strategies were benefitted by fortuitous timing,” said Paul Olmsted, senior analyst for fixed income strategies at Morningstar. “When we had a rise in short-term yields and an inverted yield curve, investors took notice that they could get some really attractive yields on the front end. CLO triple-A tranches have never defaulted, and there was enough of a yield difference for people to see CLO ETFs as a way to get out of money markets.”