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CLOs – Diversifier, or another Equity Clone?

Investigating Collateralized Loan Obligations

Nicolas Rabener
10 min read
6 Nov 2023

SUMMARY

  • Multiple collateralized loan obligation (CLO) ETFs have been launched since 2020
  • CLOs are promoted as low-risk fixed-income products
  • However, these simply represent diluted equity exposure and offer limited diversification benefits

INTRODUCTION

The U.S. leveraged loan market has increased from $100 billion in 2000 to $1.4 trillion in 2022, according to data from S&P Global, which is remarkable given that this period includes the global financial crisis in 2008 when many loans defaulted. The key role during that crisis was played by subprime mortgage debt that was promoted as low-risk securities via collateralized debt obligations (CDOs) to all types of investors.

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