“The beauty of the CLOs is that they offer us liquidity, because at the end of the day, they’re like bonds, and they trade in the market,” said Tony Kelly of BondBloxx, who co-founded the first ETF company to focus solely on fixed-income products.
“Within a private-credit CLO, there are approximately 100 different loans in the underlying [portfolio], and that’s what gives the ETF the private-credit exposure, but the CLO layer gives us the liquidity that we need to be able to manage the fund,” he told MarketWatch in a phone interview.
The $134 million BondBloxx Private Credit CLO ETF PCMM has over 80% of its assets in CLOs that invest in middle-market loans, according to the company website. A similar product from Virtus Investments – the $19 million Virtus SEIX AAA Private Credit CLO PCLO – has over 90% of its assets in middle-market CLOs.
Over the past few years, the financial-services industry has seen a significant trend of converting illiquid assets such as private-credit loans into liquid, tradable securities like CLOs.
Private-credit CLOs are a relatively new but rapidly growing segment within the broader CLO market. While broadly syndicated loan, or BSL, CLOs still dominate the CLO market in terms of scale, middle-market CLOs are gaining traction due to the rise of private credit. At the end of 2024, private-credit CLOs made up roughly 15% of the broader $1.3 trillion CLO market, according to Moody’s.
However, some CLO portfolio managers and ETF developers argue that while securitizing private credit through CLOs does enhance tradability and makes it appear more liquid to investors, it doesn’t change the illiquid nature of the underlying assets.
Unlike BSL CLOs, which pool large, publicly rated and liquid loans originated by banks and sold to multiple lenders, private-credit CLOs are more of a “black box of loans” that have less transparency and less liquidity and are nearly impossible to rate, said William Sokol, director of product management at VanEck.
The firm’s $1 billion VanEck CLO ETF CLOI invests primarily in investment-grade-rated tranches.
“How we make the decision on whether to buy a CLO is by looking at the [CLO] manager, looking at the portfolio and understanding the deal, but you can’t really do that in a private-credit CLO, because you can’t really do that level of due diligence on the underlying private loans,” Sokol told MarketWatch in a phone interview.
“We cannot get the same level of comfort around the pricing of a CLO that’s backed by middle-market or private loans that barely ever trades, and that makes it a lot less appropriate for daily liquidity of an ETF,” said Fran Rodilosso, head of fixed-income ETF portfolio management at VanEck.
Tested vs. untested during periods of market stress
Of course, the biggest risk for a credit-market investor is a systematic credit event – like a major economic downturn – that could lead to a cascade of defaults and a freeze in liquidity across credit markets.
Signs of concern emerged in the CLO market in April after tariff-fueled volatility sent the U.S. financial market into a tailspin. Investors worried that corporate borrowers faced squeezed margins and refinancing headwinds if Trump’s aggressive tariffs were to trigger a recession in the U.S. economy, and they didn’t know whether these higher-yielding investment vehicles could weather the storm.
On April 7, the $20 billion Janus Henderson AAA CLO ETF JAAA, which primarily invests in the seniormost tranches of BSL CLOs, saw $585 million in net outflows, the biggest single-day withdrawal since the fund’s inception in October 2020. The exodus also pushed the fund to trade at a record 1.1% discount to its net asset value, according to Dow Jones Market Data.
VanEck’s CLOI also experienced over $50 million in net outflows on April 8, the largest one-day exodus since the fund’s inception in June 2022, according to FactSet data.
But in the view of VanEck’s Rodilosso, the significant amount of outflows actually suggests the BSL CLO market has proven liquid and resilient.
“We’ve seen our first period of stress in April, and there was some movement into discounts to net asset value, but these CLO ETFs saw decent size of redemption activities, so the market did function,” he told MarketWatch via phone.
“It’s only one test so far, but these [BSL CLO] ETFs have held up for the most part,” Rodilosso said.
However, private-credit CLO ETFs have not yet faced a real-world systemic test and thus carry greater structural uncertainty should such an event hit.
“That would be even a bigger concern for the ETFs that are putting private credit [into their portfolio holdings] either through the loans themselves or through tranches of private-credit CLOs,” said Jon Brager, portfolio manager at Palmer Square Capital Management. “How are you managing your overall liquidity, given that the underlying [portfolio] is certainly less liquid, if not illiquid, in particular in times of stress?”
-Isabel Wang
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08-02-25 0800ET
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