Investment Insights: Why CLO ETFs Are More Liquid than Investors Think

Why It Matters

Recognizing the true liquidity of CLO ETFs enables investors to access high‑yield loan exposure efficiently, reducing transaction costs and mitigating perceived market risk.

Key Takeaways

• CLO ETFs centralize liquidity, simplifying single‑instrument trades for investors
• Misconception stems from GFC era, but AAA CLOs had zero defaults
• European ETF market fragmented; on‑screen volume may hide true liquidity
• Electronified, anonymous trading reduces need for dealer calls
• OTC and RFQ platforms provide substantial hidden volume for large orders

Summary

The discussion focuses on the liquidity profile of collateralized loan obligation (CLO) exchange‑traded funds, challenging the common perception that these products are illiquid. Host Abrau interviews Andy Baker of Jennis Henderson Investors and Matt Holden of RBC Capital Markets to unpack why CLO ETFs may be more accessible than market participants assume.

Andy traces the liquidity myth to the Global Financial Crisis, noting that AAA‑rated CLOs recorded zero defaults during that period—a testament to the asset class’s resilience. He emphasizes that managing CLOs requires specialized expertise and that the shift from over‑the‑counter voice trades to electronic platforms is still evolving. Matt explains that an ETF aggregates a basket of CLOs into a single tradable security, concentrating liquidity and simplifying buyer‑seller matching, especially as electronic, anonymous trading reduces reliance on dealer desks.

Matt highlights a structural nuance in Europe: the ETF market is fragmented across multiple exchanges, and on‑screen volume often underrepresents total liquidity. Approximately 70% of European ETF trades occur in the OTC or RFQ space versus 30% on‑screen, meaning sizable hidden depth can be accessed when larger orders are placed. Both guests point out that testing the market with sizable orders often reveals unexpected liquidity sitting in the order books.

For investors, the takeaway is clear: CLO ETFs offer a more liquid gateway to the loan market than headline volume figures suggest. Understanding the electronic trading landscape and the centralizing effect of ETFs can unlock efficient exposure, especially for European participants navigating fragmented exchanges and hidden OTC depth.

Original Description

In this Investment Insights interview, ETF Stream speaks to Andy Baker, head of EMEA ETF capital markets at Janus Henderson Investors and Matthew Holden, head of ETF trading Europe at RBC Capital Markets about why CLO ETFs are often labelled less liquid.