Uncertainty persists in 2026, affecting the broader fixed income market. Collateralized loan obligations (or CLO) have emerged as a viable option with the advent of exchange-traded funds (ETFs), which have democratized access to retail investors.
CLOs were once a niche market, exclusive to institutional investors. They consist of pools of loans, bundled and then divided into tranches based on risk and payment priority.
Relative to traditional fixed income instruments like bonds, CLOs contain additional benefits that include the following:
- Seniority: The underlying assets in CLOs consist of senior secured loans, which are paid first in the event of a liquidation or bankruptcy.
- Strong yield: In a time when the macroeconomic environment remains marked by sticky inflation, CLOs can offer higher yields than other fixed income instruments such as corporate bonds and Treasuries. In the case of AAA-rated CLOs, higher yields can come without sacrificing credit quality.
- Floating-rate features: CLOs include floating-rate loans that adjust upward if interest rates rise, helping protect an investor’s principal from price erosion compared to fixed-rate bonds.
2 Active Options
Fidelity recently introduced a pair of options that meld the benefits of active management with the flexibility, tax efficiency, and cost-efficiency of an ETF wrapper. The Fidelity AAA CLO ETF (FAAA) and the Fidelity CLO ETF (FCLO) have expense ratios of 20 and 45 basis points, respectively. However, an expense waiver is in place until January 31 of next year.
FAAA targets top-tier AAA-rated tranches for investors seeking the highest quality credit. FCLO is ideal for those looking to maximize yield opportunities with a targeted focus on CLO tranches rated BBB+ to B-.
When it comes to investing in CLOs, active management is a must, given that this market has its own unique complexities and idiosyncratic risks. Deftly navigating this space requires deep experience and knowledge.
With market uncertainty from 2025 returning in 2026 and a new U.S. Federal Reserve chair incoming, diversifying income is more pertinent than ever. Rather than relying on traditional sources like bonds, income seekers can look to funds like FAAA or FCLO for long-term wealth building, capital preservation, and/or income. They can serve as an ideal supplement to a core bond portfolio.
For more information on FAAA, click here to view the product page.
For more information on FCLO, click here.
To learn more about CLOs, click here.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
Originally published on ETF Trends
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