Heads Up, Advisors: Canada’s First CLO ETF Has Arrived!

While markedly smaller than the U.S., Canada’s ETF market has a knack for leading the way with innovative products.

From money market ETFs to high-interest savings account (HISA) ETFs, and even spot cryptocurrency ETFs, Canadians have enjoyed first-to-market access to these cutting-edge solutions—well ahead of their American counterparts.

But one advisor-focused category has been notably absent: ETFs holding Collateralized Loan Obligations (CLOs). CLOs are securitized pools of corporate loans, typically issued to companies with lower credit ratings, bundled together to spread risk and generate yield.

That all changed on September 18, when Corton Capital Inc., a boutique Canadian asset manager, introduced the Corton Enhanced Income Fund (RAAA)—Canada’s first ever ETF offering direct exposure to CLOs.

Given that this is a new product in an emerging niche for Canadian advisors, I’ve put together this quick read to explain what CLOs are and how RAAA is designed.

What are CLOs?

At first glance, CLOs might sound eerily similar to the Collateralized Debt Obligations (CDOs) that helped trigger the 2008 financial crisis. However, while they share structural similarities, the underlying assets and risk dynamics are vastly different.

A CLO is a securitized debt instrument typically backed by a pool of non-investment-grade corporate loans. For those less familiar with fixed income, this means these loans are issued to companies that don’t meet the highest credit standards—essentially, firms with higher risk for lenders.

The cash flow from these corporate loans is divided into a pre-established capital structure called tranches. Tranches range from senior to junior, with senior tranches being the safest and most likely to be paid first. Investors in junior tranches take on more risk, but they’re compensated with higher yields.

In the event of defaults within the loan pool, losses hit the junior tranches first, offering protection to the senior tranches. This structure allows CLOs to receive credit ratings similar to bonds, with the highest-quality tranches earning AAA, AA, or A ratings. This handy chart from BMO explains it well:

Now, you might be thinking, “Wait a minute—this sounds just like the setup from The Big Short.” And yes, structurally, CLOs and CDOs are similar. But the key difference lies in the underlying assets.

CDOs were backed by subprime mortgages held by individual homeowners—often risky loans with poor underwriting standards. Some “synthetic CDOs” even held tranches of other CDOs! So, when borrowers defaulted en masse, the entire structure collapsed.

CLOs, on the other hand, are backed by leveraged corporate loans—typically senior loans. Senior status means these loans are higher in the repayment hierarchy if a company does defaults, leading to stronger recovery rates. In general, corporate lending is more stable compared to consumer lending.

Moreover, most CLOs feature floating-rate loans, which adjust with interest rate changes, offering resilience in rising-rate environments unlike most bonds. Their overall yields are competitive compared to investment-grade credit and even high-yield bonds.

Finally, while the past is no guarantee of future performance, CLOs have demonstrated stability over time. According to S&P Global, no AAA-rated tranche of a CLO has ever defaulted since their inception in the mid-1990s.

RAAA explained

RAAA is Canada’s first ETF offering exposure to CLOs. This actively managed ETF partners with Astra Asset Management UK Ltd. as its sub-advisor. It charges a 0.7% management fee. While higher than typical fixed-income ETFs, this is not unusual for alternative strategies.

Here’s how it works: at least 60% of RAAA’s assets are expect to be allocated to AAA-rated CLOs, with the remainder in AA- and A-rated tranches. The fund is geographically diversified, and may hold CLOs from both the U.S. and Europe.

Why does this matter? European CLOs are subject to a “risk retention rule,” which requires CLO issuers to hold at least 5% of their own issuance.

This ensures issuers have skin in the game, significantly reducing moral hazard—the temptation for managers to take excessive risks when they don’t share in potential losses. This rule addresses a key problem that plagued CDO managers during the 2008 financial crisis.

Corton Capital Inc. highlights that CLOs in general have low correlation to equities and traditional bonds (0.18 versus the S&P 500 and 0.23 versus the FTSE Canada Universe Bond Index), making the asset class a strong diversifier.

The main takeaway? RAAA provides an alternative source of yield with a high-quality portfolio of AAA-, AA-, and A-rated CLO tranches. The fund is expected to deliver a net yield of 5.20-5.40% paid quarterly, and its floating-rate nature minimizes interest rate risk. As an ETF, it also offers intraday liquidity and stock-like trading.

I’ll be keeping an eye on this ETF, and savvy advisors should too—it represents a unique opportunity to diversify portfolios with a stable, alternative income-generating asset class.