Why CLOs Offer More Stable Yield Potential Than Corporate Credit

While traditional corporate bonds remain a default choice for income-focused portfolios, historical default data and market structures reveal a compelling anomaly. Collateralized loan obligations (CLOs) consistently provide a more stable risk profile and strong structural seniority compared to corporate bonds. As John Kim, CEO of Reckoner Capital Management, explained during a recent TMX VettaFi webcast, Navigating the CLO ETF Landscape , this historical performance relates to institutional mispricing.

The core advantage of a CLO is its underlying collateral. Standard corporate bonds typically consist of unsecured obligations exposed to direct company defaults. On the other hand, a diversified pool of senior secured loans back CLO tranches. These assets sit at the top of the corporate capital structure, which gives them first-priority claims on corporate collateral. Furthermore, if the underlying loan portfolio is stressed, cash flows are systematically diverted from equity holders to shore up or pay down senior bonds. This built-in insurance mechanism is completely absent from traditional corporate bonds, where investors have naked exposure to individual issuer defaults.

As Kim noted, this multi-layered structure translates into a near-flawless default history. Long-term rating agency data compiled by S&P highlights an extraordinary variance between corporate and structured credit impairments. In the post-crisis CLO 2.0 era, AAA- and BBB-rated CLO tranches have maintained a cumulative default rate of exactly 0%. In stark contrast, similarly rated traditional investment-grade corporate bonds suffered default rates of roughly 1% for AAA and 5% for BBB. Even at the BB-rated tier, CLOs recorded a minimal 0.58% default rate, compared to a 15.9% standard default rate for similar high-yield corporate bonds.

Two active funds, noted during the webcast, encapsulate exposure to CLOs: Reckoner Yield Enhanced AAA CLO ETF (RAAA) and Reckoner BBB-B CLO ETF (RCLO) . The former is ideal for those looking to diversify their monthly income potential with CLO exposure to top-tier AAA-rated credit. The latter speaks to investors looking to diversify their monthly income potential with CLO exposure to BBB- to B-rated credit.