Rising tariff turmoil has sparked a run from credit-sensitive instruments, with escalating trade tensions threatening economic stability. Wednesday’s GDP print stoked recessionary fears when it showed the U.S. economy contracted for the first time since early 2022. Meanwhile, the ADP private payrolls report was much softer than expected.
The latest wave of tariffs has triggered a $2.1 billion exodus from leveraged loan funds over the past month. That marks the steepest outflows since the 2022 Federal Reserve rate-hiking cycle began. Corporate borrowers are facing squeezed margins and refinancing headwinds. So, many advisors are questioning whether these higher-yielding vehicles can weather the storm, or if the sell-off is just beginning.
These ETFs, once darlings of the hunt for yield, now face a triple threat: tariff-driven growth fears, tighter liquidity. and a looming maturity wall for low-rated debt. Over the past month, long-duration Treasury, mortgage-backed securities, and senior loan ETFs suffered some of the heaviest outflows. High-yield corporate bond ETFs and even a handful of municipal bond funds saw heavy outflows as well.
| Biggest Bond ETF Outflows (1-Month) | |
|---|---|
| Net Flows ($B) | |
| Vanguard Mortgage-Backed Securities ETF (VMBS) | ($4.90) |
| iShares 20+ Year Treasury Bond ETF (TLT) | ($2.70) |
| Invesco Senior Loan ETF (BKLN) | ($2.30) |
| iShares Core U.S. Aggregate Bond ETF (AGG) | ($2.10) |
| Vanguard Total Bond Market ETF (BND) | ($1.90) |
| SPDR Bloomberg High Yield Bond ETF (JNK) | ($1.70) |
| iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) | ($1.50) |
| Janus Henderson AAA CLO ETF (JAAA) | ($1.30) |
| iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) | ($1.30) |
| SPDR Blackstone Senior Loan ETF (SRLN) | ($1.20) |
| iShares iBoxx USD High Yield Corporate Bond ETF (HYG) | ($1.20) |
| Vanguard Long-Term Corporate Bond ETF (VCLT) | ($1.20) |
| iShares National Muni Bond ETF (MUB) | ($1.20) |
CLO ETFs Feeling the Bleed
Grouped into that bucket are CLO ETFs, like the $20 billion Janus Henderson AAA CLO ETF (JAAA ), a behemoth in the space, which saw $600 million in net outflows in the biggest single-day outflow in the fund’s history in early April.
But John Kerschner, head of U.S. securitized products and portfolio manager at Janus Henderson, said despite the outflows, the underlying CLO market has actually proven extremely resilient, liquid, and orderly amid a major economic dislocation.
“CLOs stand out for their robust credit quality, with approximately 80% of securities rated between AAA and A,” he said. “While many CLO ETF investors are long-term investors in AAA CLOs, during periods of heightened volatility, some investors may use the asset class as a funding vehicle, given the significant liquidity and asset class resiliency to deploy capital to other areas of the market, such as equities.”
He noted that while the ETFs have seen redemptions, they still represent only a small percentage of the overall CLO ETF AUM. He also said he continues to believe a strategic allocation to AAA CLOs, with their attractive floating-rate yields, high credit quality, and low correlation to other fixed income sectors, remains a key component of a strategic fixed income allocation. On a flows basis, JAAA remains the top global active fixed income ETF so far this year.
Why So Much Concern?
Economic weakness often erodes creditworthiness, but in its more than 30-year history, AAA CLO ETFs have historically faced zero default risk. So, why all the fear?
Bill Sokol, director of product management at VanEck, told me it’s not just default risk investors must consider in today’s environment. Even for investment-grade CLOs more broadly, structural protections exist to insulate investors from losses in the portfolio. Since the financial crisis of 2008, there has never been an investment-grade CLO default.
“Even prior to that, when structures were less robust, default rates were negligible, even in BBBs,” he said. “However, CLOs are not risk-free. A deteriorating credit environment can result in a decline in a CLO’s market value because of wider credit spreads, which means investors are exposed to mark-to-market risk in a credit market sell-off.”
Still, he noted, AAA volatility would typically be lower relative to lower-rated tranches or asset classes like high yield bonds or leveraged loans. “Redemptions may reflect a desire to de-risk and move into an asset class with lower credit risk or could also reflect a reallocation into more impacted areas of the market if [investors] see any opportunities,” he added.
Sokol manages VanEck’s suite of CLO ETFs, including the VanEck CLO ETF (CLOI ) and the VanEck AA-BB CLO ETF (CLOB).
Danielle Gilbert, managing director at Eldridge Capital Management, who runs the Eldridge AAA CLO ETF (CLOX ) and the Eldridge BBB-B CLO ETF (CLOZ ), agreed. She told me she thinks there’s still an educational barrier that needs to be bridged to separate fear from fact.
“For investors, we believe CLO AAA ETFs can provide a compelling mix of high-quality yield, diversification, and minimal risk, with a historical default rate of zero,” she said. “Recent outflows likely reflect market sentiment … and misconceptions conflating CLOs with riskier structured products — rather than structural flaws."
Gilbert will be speaking more about CLOs on her upcoming panel next week at VettaFi’s Income Investment Strategy Symposium, taking place on Thursday, May 8.
Bottom Line
Recent outflows from CLO ETFs and leveraged loan funds may reflect broader risk aversion amid tariff uncertainty. But the underlying fundamentals of AAA CLOs remain strong. These instruments — backed by floating-rate yields, high credit quality, and near-zero historical defaults — still offer a compelling case for strategic fixed income allocations.
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