Europe’s CLO ETF market gains momentum despite cautious regulatory tack

Exchange traded funds of collateralised loan obligations remain a fledgling asset class in Europe, having existed for less than two years. The first European CLO ETF — the Fair Oaks AAA CLO ETF — was only launched in September 2024.

Conceptually, CLO ETFs are simply ETFs that invest in CLOs. Most are actively managed and loosely track an index, with JP Morgan’s European CLO index proving popular among fund managers.

Unlike an ETF that invests in equities, a CLO ETF typically cannot replicate an index. The presence of large buy-and-hold investors in the CLO market means that it is sometimes impossible for a CLO ETF to invest in all the CLOs listed on an index.

This is particularly true of triple-A rated CLO notes, in which most European CLO ETFs invest. Triple-A rated notes attract investors like banks that may choose to purchase large blocks of the paper and retain these investments for the long term.

Triple-A rated CLO tranches are not liquid enough for the ETFs to match any particular index exactly. Managers of CLO ETFs tend to use the indices as a benchmarking tool rather than an exact investment template.

Since September 2024, institutions such as Janus Henderson Investors, Palmer Square Capital Management, Invesco and BlackRock have all come to the market with their own CLO ETFs.

Janus Henderson played a large part in creating the asset class, listing the first ever CLO ETF on the New York Stock Exchange in 2020.

European CLO ETFs have now amassed a combined total of €1.4bn of assets under management (AUM), research from Bank of America (BofA) shows. This modest figure is set against a European CLO market that has grown to almost €300bn and a US CLO ETF market that reached a total AUM of $33bn by August 2025.

One advantage of the ETFs is their ability to bring new investors into the CLO market. The ETFs are slowly increasing as these new investors dip their toes into investing via the structure.

“Historically, investing in CLO triple-As was reserved for very large institutional clients that could buy and hold significant volumes,” says Paul Syms, head of EMEA ETF fixed income and commodity product management at Invesco.

“CLO ETFs democratise the access point to CLO triple-As and allow smaller investors to come into the market. Investors like family offices and pension funds are now able to enter the CLO market more easily than they were in the past. CLO ETFs also provide diversified access to the CLO market. Additionally, CLO triple-As are also low-duration and have low levels of volatility, making CLO ETFs attractive.”

Investing in individual CLOs tends to require large upfront capital commitments and considerable expertise in the sector, shutting out smaller investors and others less familiar with the product.

For example, investing in the triple-A rated tranche of an individual CLO might require upwards of €100m, as well as thorough due diligence about the CLO’s manager and collateral pool.

Not all investors that would like to invest in CLOs have this balance sheet capacity or knowledge of the market.

Investments can be larger or smaller, enabling investors like family offices to access the market. Wealthy individuals can also invest in CLO ETFs through brokerage accounts at private banks.

While many institutional investors like pension funds invest in CLOs directly, CLO ETFs allow firms with less experience to enter the CLO market.

The nature of an ETF investment means investors gain diversified exposure to a number of different CLOs and managers. This reduces the risk, allowing investors who are not necessarily specialists in the instrument to become comfortable with the exposure.

“I think some of the growth in CLO ETFs will come from Switzerland and the private bank space,” says Jon Brager, a managing director and portfolio manager at Palmer Square Capital Management. “Rate fluctuations look set to continue, so traditional income products like core bond funds are seeing a lot of volatility.

“Fiscal situations are also getting worse across a lot of European countries, meaning that government bonds will be less of a safe haven. Floating rate instruments are a great way to mitigate this volatility, which makes CLO ETFs more appealing to private banks and their clients. But European CLO ETFs do remain fairly nascent, because they are a new product for investors.”

Triple-A rated CLO tranches attract investors because of their low duration risk — they are floating rate notes with quarterly resets — and because they generally pay higher spreads than investment grade corporate bonds.

Research from TwentyFour Asset Management shows that while the yield on euro triple-A CLO notes was about 3.84% in April, the yield on the European investment grade corporate bond index was only around 3.41%. The corporate bonds in the index also have a lower average rating of BBB+.

Managers of CLO ETFs have to convince investors of these selling points, but there are clear reasons why the format might complement some investors’ portfolios, attracting more capital to the product.

“One of the reasons we launched our CLO ETF was to target investors we could not reach with our existing funds,” says Miguel Ramos Fuentenebro, a partner at Fair Oaks Capital. “For example, there are some investors that have limits as to how much they can invest in funds, but can invest in ETFs. There will definitely be growth in the CLO ETF market in Europe, particularly as education about CLOs increases.”

A use case for ETFs even exists for some of the investors who buy the most senior tranches of CLOs directly. Ordinarily, when investors take positions in a new issue CLO, the capital they commit accrues no interest in the six to eight weeks between the CLO being priced and settled.

Some investors are now investing their capital in the ETFs during this period, giving them a proxy for the triple-A rated CLO notes they have agreed to purchase. This strategy is made simpler because investors can buy or sell ETFs each day.

Banks that invest in triple-A rated CLOs will, however, be unlikely to use ETFs as regulatory capital requirements make it more efficient for them to invest in CLOs directly.

The small size of the European CLO ETF market compared to the US is no surprise. The asset class has existed in the US for longer and the CLO market is much larger there than in Europe.

Favourable regulation, particularly concerning the tranches in which the funds can invest, has helped CLO ETFs grow rapidly in the US.

“The US makes up the majority of the global CLO market and benefits from much deeper liquidity,” says Michael Craig, head of European senior loans at Invesco. “Importantly, under the US regulatory framework, CLO ETFs can be structured to invest down the CLO capital stack.

“In contrast, European UCITS [Undertakings for Collective Investment in Transferable Securities] regulation effectively restricts CLO ETFs to a predominantly triple-A allocation, typically requiring at least 80% in triple-A tranches with only limited exposure to lower-rated debt.”

The primary reason European regulators have limited CLO ETFs mainly to triple-A rated paper is due to liquidity concerns. Regulators want to be sure that the funds can provide daily liquidity to their investors.

While shares in CLO ETFs have a secondary market, some investments or redemptions require the sale or purchase of ETFs’ underlying assets. There must be sufficient liquidity in these underlying assets to allow for the intra-day trading of ETFs.

Triple-A rated CLO notes clear the daily liquidity threshold easily. They represent more than 60% of the CLO market and have enough investors to remain liquid. As CLO tranches become less liquid further down the rating spectrum, regulators are reluctant to expand the reach of CLO ETFs beyond those scored triple-A.

Regulatory caution is designed to protect investors. If CLO ETFs perform well under current regulation, European regulators might allow them to invest in other CLO tranches, in line with the US.

The mezzanine tranches of CLOs offer higher spreads than the triple-As. Allowing CLO ETFs to invest in these tranches would draw in other investors, expanding the size of the market.

Retail investors in the US can invest in CLO ETFs, unlike in Europe. This is also about shielding investors from risk, but a wider investor base would increase the amount of capital flowing into the ETFs and by extension the European CLO market.

Beyond regulation, the growth of European CLO ETFs will depend on these instruments winning investor approval. This will take time, especially given that the ETFs are partly designed to target investors outside the traditional CLO market.

“Almost all the European CLO ETF investor base is made up of institutional investors who did not naturally have access to securitized products in the past,” says Denis Struc, a fixed income portfolio manager at Janus Henderson.

“European CLO ETFs have only existed for 18 months and that is not a lot of time for fund managers to engage with relevant clients and to go through the rounds of education and risk approval with these clients. My view is that the asset class will grow more rapidly over the next two years now that the hard foundational work has been done.”