Podcast
The CLO Boom and What Comes Next with John Kerschner
This week’s episode of Industry Insights: Exclusive Interviews explores the remarkable transformation of CLO ETFs from specialized institutional products to mainstream investment vehicles. Host Julie Miecamp brings together Octus reporter Diana Bravo and John Kerschner, Global Head of Securitized Products at Janus Henderson, to unpack how CLO ETFs jumped from niche to a $25+ billion market and what this growth trajectory means for investors.
From Institutional Access to Retail Investors
The episode begins by highlighting the origins of CLO ETFs, with John Kerschner sharing how Janus Henderson’s acquisition of Velocity Shares’ ETF platform in 2015 was the start of a groundbreaking shift. Originally accessible only to institutional investors due to high minimum investment requirements, CLO ETFs have democratized access to a $1.2 trillion U.S. market (and an additional $250 billion in Europe). By wrapping CLOs into ETFs, these products brought complex, institutional-grade investments to retail investors, opening up opportunities to a broader audience.
Kerschner reflects on the launch of JAAA in 2020, explaining why CLOs are a natural fit for an ETF structure. He emphasizes the role of active management in setting JAAA apart from competitors in a market historically dominated by passive investment products.
The Role of Rising Rates in Adoption
A significant portion of the discussion focuses on how the rising interest rate environment played a major role in accelerating CLO ETF adoption. Unlike traditional fixed-income portfolios, which suffered during rate hikes, CLO ETFs benefited from their floating rate structure, offering a hedge against rising rates while maintaining institutional-grade credit quality.
The episode outlines key benefits of these ETFs, including their daily liquidity, ability to provide strong risk-adjusted returns, and resilience during periods of volatility. Kerschner and Bravo explain how these factors, combined with robust investor education efforts, helped Janus Henderson capture 75-80% of the growing CLO ETF market.
Stress Testing the Market
The conversation moves on to examine how recent market events validated the durability of CLO ETF structures. Kerschner discusses how moments of volatility served as unintentional stress tests, showcasing the strength of their design. CLO ETFs maintained stable price-to-NAV relationships, tight bid-ask spreads, and relied on in-kind redemptions to prevent forced asset sales, ensuring stability for shareholders even during turbulent times.
Kerschner highlights how these technical features of CLO ETFs provide peace of mind for both retail and institutional investors, demonstrating their reliability in challenging market conditions.
International Expansion and Regulatory Landscape
The team also explores the global potential of CLO ETFs, particularly in Europe. With a €250 billion European CLO market, Janus Henderson’s European CLO ETF launch taps into new opportunities while addressing regulatory and tax considerations for offshore investors.
The episode touches on the regulatory factors shaping the market, including UCITS compliance in Europe, tax optimization for global investors, and cautious approaches to mezzanine tranches in structured credit. While challenges remain, the potential for growth in international markets is clear.
Future Growth and Market Outlook
John Kerschner provides a forward-looking perspective on the CLO ETF market, noting the immense potential for growth as cash-heavy investors seek alternatives to money market funds. With over $30 trillion in cash looking for yield and money market fund assets exceeding $7 trillion, CLO ETFs are well-positioned for continued expansion.
Kerschner predicts significant growth for JAAA and other CLO ETFs, citing strong demand from both retail and institutional investors. He also shares insights into the importance of statistical skills for young professionals entering the field and reflects on the evolving role of ethical leadership in finance.
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Produced and edited by two-time Emmy Award-winning producer Tanya Hubbard.
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