Podcast: An Intro to CLOs
May 21, 2025In today’s episode, special guest Mark Jarosz, and your host, Zayla Saunders, take us to the top of the cash flow waterfall to provide must-know answers to your collateralized loan obligation, or CLO, questions. They delve into everything from their history to the intricacies of how they work.
Zayla Saunders is a Senior Associate of Online Distribution at BMO Global Asset Management (GAM). She is joined on the podcast by Mark Jarosz, Lead, Private Credit, Alternatives, at BMO GAM. The episode was recorded live on Wednesday, May 21, 2025.
ETFs mentioned:
- BMO AAA CLO ETF (Ticker: ZAAA)
- BMO AAA CLO ETF (Hedged Units) (Ticker: ZAAA.F)
- BMO AAA CLO ETF (USD Units) (Ticker: ZAAA.U)
Collateralized Debt Obligation (CDO): A structured financial product where a bank or other entity pools together various types of debt, like mortgages, bonds, and loans, and repackages them into tranches, or classes of securities, based on their risk level.
Correlation: A statistical measure of how two securities move in relation to one another. Positive correlation indicates similar movements, up or down together, while negative correlation indicates opposite movements (when one rises, the other falls).
There have historically been zero defaults on AAA tranches through the 30-year history of CLOs. Source: Bloomberg, as of December 31, 2024. Past default rates do not guarantee future default rates.
Source: Size of the CLO market and CLO ETF market, Bank of America, factbook March, 2025.
Disclaimers:
Please see the full CLO ETFs disclaimers here.
Changes in rates of exchange may also reduce the value of your investment.
CLOs are floating- or fixed-rate debt securities issued in different tranches, with varying degrees of risk, by trusts or other special purpose vehicles (“CLO Issuers”) and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The BMO ETF pursues its investment objective by investing, under normal circumstances, at least 85% of its net assets in CLOs that, at the time of purchase, are rated AAA or the equivalent by a nationally recognized statistical rating organization.
AAA herein refers to the order of payments, should there be any defaults, and does not represent the ratings of the underlying loans within the CLO. If there are loan defaults or the CLO Issuer’s collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches (a tranche or tranches subordinated to the senior tranche), and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. The riskiest portion is the “Equity” tranche, which bears the first losses and is expected to bear all or the bulk of defaults from the corporate loans held by the CLO Issuer serves to protect the other, more senior tranches from default.
The viewpoints expressed by the speakers represent their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
The portfolio holdings are subject to change without notice. They are not recommendations to buy or sell any particular security.
All investments involve risk. The value of an ETF can go down as well as up and you could lose money. The risk of an ETF is rated based on the volatility of the ETF’s returns using the standardized risk classification methodology mandated by the Canadian Securities Administrators. Historical volatility does not dictate how volatile an ETF will be in the future. An ETF with a risk rating of “low” can still lose money. For more information about the risk rating and specific risks that can affect BMO AAA CLO ETF’s returns, see BMO AAA CLO ETF’s prospectus.
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For a summary of the risks of an investment in BMO AAA CLO ETF, please see the specific risks set out in the prospectus.
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