| “Anyone who stops learning is old, at twenty or eighty. Anyone who keeps learning stays young” |
| Henry Ford |
I posted the quote above on my LinkedIn about a year ago. It's always a good day when you learn something new. It keeps you fresh; it keeps you alive.
The best moments in finance are when something clicks—when you hear a concept so well-articulated you walk away thinking, how is this not on everyone’s radar?
That was my feeling about this Real Conversation hosted by Hedgeye CEO Keith McCullough featuring Danielle Gilbert, Managing Director at Eldridge Capital Management.
Let’s explore the new world of CLO ETFs and highlight the opportunity that CLOs can provide YOU in YOUR portfolio.
Before we start, we have to fundamentally understand what a CLO is.
What Even Is A CLO?
A Collateralized Loan Obligation (CLO) is an investment vehicle that provides exposure to a diversified pool of 200–300 corporate loans. These are known as senior secured loans—meaning they’re backed by collateral which offers an added layer of protection for investors.
The CLO vehicle breaks these loans into pieces called tranches, from the safest (AAA) to the riskiest (CLO Equity). In the following slide from Eldridge’s deck, the structure is visualized in terms of how payments are prioritized.
The cash flows from the loans are distributed using a “waterfall” structure—the safest tranches get their interest and principal paid first, while the riskier ones get paid later.
This means that riskier tranches like BBB and BB take on more risk but are also able to generate higher returns.
As Danielle pointed out in the webcast, a CLO is significantly different from their evil cousin, the CDO, which caused lots of trouble during the 2008 financial crisis.
Unlike CDOs, CLOs are actively managed, substantially more diversified, and based on loans to businesses—not subprime mortgages. Historically, AAA-rated CLOs have never had a default, even over decades of market-tested drawdowns.
Who owns them?
For years, investing in CLOs was out of reach for most individuals—reserved for banks, hedge funds, and insurance companies that could meet minimums of $50 to $100 million.
But today, that has changed.
In 2020, CLOs were introduced through an ETF structure, which effectively opened the door for retail investors to access this resilient asset class.
The total CLO market has more than doubled since 2018 to over $1.3 trillion with only $29 billion being in CLO ETFs.
What makes a CLO ETF attractive?
Put simply:
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Strong relative returns
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Low Rate Sensitivity
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Highly Liquid
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Attractive Risk Profile
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Resilient Default Structure
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Monthly Cash Flows
Let’s evaluate each component.
Strong Relative Returns
With net yields north of 8% annually on CLOZ and AAA-rated options like CLOX earning 5.5% tied to short-term rates (SOFR), the yield is certainly there.
I ran a backtest comparing the Eldridge BBB-B CLO ETF (CLOZ) to the SPDR S&P 500 ETF (SPY) and US Treasury 10-Year Note ETF (UTEN) from February 2023 to April 2024.
Here’s the breakdown:
From a portfolio optimization standpoint, one of the most important characteristics of CLOs is their very low correlation to stocks and bonds.
“I mean, look at the 60/40 in 2022—everything experienced increased correlation; people didn’t even learn from that recent,” Gilbert said.
In the backtest above, CLOZ exhibited a maximum drawdown of just 1.35% compared to 9.64% for the 10-Year Treasury Note.
The chart also highlights a notable difference in volatility, with CLOZ realizing only 3% annualized volatility compared to 12.7% and 8.3% for SPY and UTEN, respectively.
With less correlation and lower volatility, it translates to saying that CLO ETFs can be considered as a powerful dampening mechanism in a multi-asset portfolio.
Low Rate Sensitivity
As Danielle also mentioned in the webcast, CLOs have a hidden party trick — low sensitivity to interest rate changes.
“What’s great about the CLO product is that you can take that interest rate risk off the table,” Gilbert noted.
This is because they are floating-rate instruments, meaning their interest payments adjust quarterly based on benchmark rates like SOFR or Euribor.
As a result, CLOs have historically outperformed fixed-rate instruments during periods of rate increases, offering a valuable hedge to downside drawdowns.
Liquidity
Gilbert also pointed viewers to “think about the regional bank crisis. The regional banks were sitting on long-term treasuries.”
Within a short period of time there was a run to pull deposits, where regional banks like Silicon Valley Bank “were mismatched on their assets and their liabilities. If those banks had owned AAA CLOs, they’d probably be around today,” Gilbert said.
The CLO market is highly liquid, with over $40 billion in trades executed this year alone. CLOs are Tier 1 settled, meaning they trade and settle with the same ease and speed as other major institutional credit instruments.
Attractive Risk Profile
As Keith pointed out in the interview, many family offices are familiar with fixed-income ETFs like JNK, HYG, or LQD but often miss out on both diversification and risk-adjusted yield opportunities that CLOs provide.
“Why would I buy HYG? I mean, the differential in yield alone, and take on the rates risk? I wouldn’t do that. But prior to these types of introductions, I would have to think about doing that because I wouldn’t have anywhere else to go,” McCullough said.
Compared to HYG, which is sensitive to rate moves, CLOZ is more of a strategic, all-weather allocation—allowing you to clip yield and not worry about the Fed.
Add in historically low default rates and low correlation to both equities and traditional credit, and you have an income asset that compounds quietly in the background, not one that swings with the headlines.
Resilient Default Structure
The strong historical performance of CLOs stems from their layered risk protections and active management. CLO portfolios are highly diversified and allow managers to adjust sector exposures in real time based on market conditions.
What’s key to note about CLOs is that their exposure is limited to 15% per sector. This is critical in avoiding defaults.
Thanks to this structure, CLO default rates have remained remarkably low—especially in modern CLOs (CLO 2.0), where even BBB-rated tranches have seen 0% defaults, far outperforming similar-rated corporate bonds.
Monthly Cash Flows
The cherry on top of the CLO ETF sundae is that they pay out monthly dividends. In my backtest I displayed earlier, CLOZ produced $1,240 in total dividend income from a starting balance of $10,000 across the 14-month period, cementing its appeal as an income-generating alternative in multi-asset portfolios.
How CLOs Fit Into YOUR Portfolio
What’s so captivating about this CLO products are that they act as a hybrid investment that combines the style of returns similar to private equity or private credit with a cash flow distribution more akin to bonds.
How to Invest: Accessing CLOs Through Eldridge
With Eldridge’s CLO ETF lineup—CLOZ and CLOX—investors can now access this $1.3 trillion market with the liquidity, simplicity, and transparency of an ETF.
What sets Eldridge apart isn’t just access—it’s expertise. CLOs are complex, and manager selection is critical. Eldridge brings deep experience in navigating the CLO landscape before, during, and after financial crises.
Through active portfolio management, real-time analytics, and rigorous credit and structural analysis, Eldridge’s ETFs seek to deliver compelling yield with disciplined risk management.
Whether you’re looking for high-yield exposure with CLOZ (8.25% yield, BBB & BB-rated) or a capital preservation play with CLOX (5.53% yield, AAA-rated), Eldridge provides a risk-return dial you can adjust to fit your strategy—all while avoiding the interest rate sensitivity of traditional fixed income.
To find more hidden gems like Eldridge Capital Management ETFs, subscribe to Keith McCullough’s Portfolio Solutions to keep your risk management tools sharp.
Putting A Bow On It
In a world chasing volatility and moonshots, CLOs offer something rare—discipline.
Today’s markets are defined by extremes. On one end, you have the "go big or go home" mentality—epitomized by the ARK ETF and Cathie Wood’s hyper-growth strategies which are fueled by volatility and narrative-driven names.
In this environment, true portfolio stability is becoming a rarity.
That’s where CLOs offer a stark contrast. With floating-rate structures, low historical default rates, and yields that can exceed 8% (CLOZ) or provide AAA-rated safety at over 5% (CLOX), we can finally access institutional-grade credit exposure with daily liquidity and monthly cashflow.
These ETFs are actively managed and are specifically designed not to juice returns, but rather to preserve capital, compound yield, and weather volatility — all trademarks of what Hedgeye stands for.
The way I think about it is this: we now have the ability to become lenders through an ETF wrapper and receive returns monthly—or reinvest and compound them—all while remaining liquid.
It’s niche but extremely consequential.
I’d rate this Real Conversation an A++ from Keith McCullough & Danielle Gilbert.
Watch the full interview here.
Cheers,
