Michael Batnick and Ben Carlson interview Michael Laughlin, Executive Director and ETF Client Product Specialist at Janus Henderson Investors, discussing their dominant position in the CLO ETF market.

The conversation explores the $27 billion JAAA ETF (Janus Henderson AAA CLO ETF), which has become the largest CLO ETF since launching in late 2020. Laughlin explains how CLOs differ from the problematic CDOs described in The Big Short, emphasizing their structural protections and historical performance.

The discussion covers the mechanics of collateralized loan obligations, their role in fixed income portfolios, and Janus Henderson's broader securitized products including JSI, which invests across asset-backed securities, commercial mortgage-backed securities, and alternative assets like music royalties.

CLO Fundamentals and Market Dominance

JAAA offers 5% yield with 1% volatility, floating rate structure, and zero defaults in asset class history - 'Since inception at the end of 2020, the volatility has been around 1%' - Mike

CLOs securitize senior secured bank loans to U.S. companies like American Airlines and Bass Pro Shops, with the $1.6 trillion bank loan market seeing 70% packaged into CLOs

The asset class has existed for three decades, traditionally dominated by institutional investors like insurance companies and banks before ETF accessibility

Structural Protection and Risk Management

AAA CLO tranches receive 35% over-collateralization protection, meaning '$650 million AAA tranche backed by $1 billion in loans' - Mike

Waterfall structure ensures lower tranches absorb losses first: 'AA can't get paid one penny until the triple A gets paid in full' - Mike

Even during 2008 financial crisis peak corporate loan default rate of 14%, the 35% over-collateralization buffer protected AAA tranches from losses

March 2020 represented worst performance with 5% monthly decline during economic shutdown, but recovery occurred in April-May

Yield Premium and Market Positioning

CLOs trade 51 basis points over corporate bonds and 100 basis points over AAA corporates due to complexity and limited benchmark inclusion

Floating rate structure resets quarterly in January, April, July, and October, providing protection against rising rates without duration risk

Current environment offers 130 basis points over money market funds as rates fall from psychologically important 4% level to mid-3s range

Broader Securitized Strategy and Opportunities

JSI securitized income ETF invests across five subcategories: agency mortgages, non-agency mortgages, commercial mortgages, asset-backed securities, and CLOs

Home equity loans represent compelling opportunity with prime borrowers locked into 2.5-3% first mortgages taking 8-10% second mortgages against 35-40% loan-to-value ratios

Alternative asset-backed securities include music royalty positions backed by Shakira, Red Hot Chili Peppers, Journey, and Justin Bieber catalogs

Commercial real estate focus on single-asset, single-borrower deals in trophy properties like Hudson Yards and MetLife building, avoiding broad conduit exposure

Education and Market Misconceptions

CLOs face negative association with CDO-squared products from 2008 crisis, though underlying collateral consists of senior secured corporate loans rather than subprime mortgages

Education strategy leads with attributes (5% yield, 1% volatility, floating rate, zero defaults) before explaining structural complexity

Janus Henderson offers risk spectrum from JAAA (35% over-collateralization) to JBBB (10-12% over-collateralization) with corresponding 1% to 3.5% volatility ranges