Investing Ideas

Why CLOs stand out in today's fixed income environment

Floating-rate structures, strong historical performance, and built-in protections are pushing CLO tranches to the forefront as investors navigate inflation risks and rate uncertainty.

By: Brian Drainville Michelle Liu
Updated: 3/10/2026
Key Takeaways
  • The multiple debt tranches of CLOs (collateralized debt obligations) offer compelling yields relative to duration and can benefit from floating‑rate coupons that can help insulate investors from interest-rate volatility.
  • CLOs feature multiple layers of defense—seniority in the capital structure, diversification across hundreds of loans, and limits on lower‑quality holdings—that we believe have contributed to historically low default and impairment rates.
  • Over the past decade, CLO tranches across the quality spectrum have outperformed similarly rated corporate credit, demonstrating a consistent track record of competitive total returns.
  • While CLO ETFs have broadened access beyond institutional investors, outcomes still depend heavily on manager skill, tranche selection, and an informed understanding of liquidity, credit‑cycle, and structural risks.
Get the full white paper
Why CLOs stand out in today's fixed income environment
Download PDF

Understanding CLO fundamentals

What are CLOs?
What are CLOs?

Collateralized loan obligations (CLOs) are structures that pool together a large number of underlying corporate loans. CLOs then issue securities backed by those loans, but with varying levels of seniority. CLOs have long been favored by institutions like banks, insurers, pensions, and endowments, for the potential access to higher yields and the ability to fine-tune credit-rating exposure. CLOs hold bank loans, which can also be called floating-rate loans or leveraged loans. These are loans issued with rates that “float,” or adjust periodically—typically at some kind of set premium over a short-term market rate. The loans are generally issued by below-investment-grade companies and are often a favored form of financing used by private equity firms in conducting leveraged buyouts. But they’re not concentrated in any one sector or pocket of the economy—which helps provide diversification.

Features of CLO funds may include:
​
  • Potentially higher yields
  • Limited interest rate risk
  • Embedded credit protections
  • Credit risk and price volatility
  • Daily liquidity
Explore more on:
Fixed income Leveraged loans

Next steps to consider

Asset Allocation Research Team (AART)

Access economic, fundamental, and quantitative analysis from our Asset Allocation Research Team.

Learn more

Fidelity Portfolio Quick Check®

Analyze, compare, and optimize your investment strategy in minutes with our free on-demand digital portfolio analysis tool.

Learn more

Related insights

View all
Investing Ideas
Allocating to multi-asset income
How dynamic income strategies can add value in the investment mix.
Investing Ideas
Opportunities in bonds
Despite recent volatility, the fixed income outlook looks bright.
Investing Ideas
What leveraged loans can do for your portfolio
How the high starting yields of loans could add value even if rates continue to move lower.

  • For important information, see the full linked content.
1250181.1.0
A0DB8B03777B4E7B8E7C78D28E365DFC