Brompton Wellington Square AAA CLO ETF targets floating-rate resilience

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Wellington Square’s Jeff Sujitno says floating-rate CLOs may be the missing piece in the fixed income puzzle

FOR CANADIAN advisors who remember the early emergence of senior loans in client portfolios, the growing attention to collateralized loan obligations (CLOs) may seem familiar. Jeff Sujitno, portfolio manager at Wellington Square Advisors, a sub-advisor at Brompton Funds, sees the current moment as a natural evolution of what took place in the domestic credit landscape roughly a decade ago. “There’s a clear analogue to what happened in the leveraged loan world, where a number of firms entered the space and made it a real asset class in Canada,” he says. “I believe CLOs will surpass that in terms of investor excitement and adoption.”

Brompton Funds is an experienced investment management firm offering income and growth-oriented investment solutions including exchange-traded funds, split share funds, and other TSX-traded investment funds. Brompton leverages over 25 years of experience to provide unique, well-conceived, and value-added strategies to individual investors in Canada with a focus on meeting investors’ needs by offering innovative products with client-friendly terms and supported by strong corporate governance.

CLOs offer attractive yield with minimal duration risk

“CLOs give you a higher yield than similarly rated bonds. More importantly, they’re floating rate and reset quarterly. That low duration makes them a strong fit for portfolios going forward”

Jeff Sujitno, Wellington Square

CLOs, which are structured portfolios of senior secured loans to large corporations, have long been staples in US institutional portfolios and recently gained traction with retail investors south of the border. In Canada, however, CLOs remain relatively unknown despite their structural features aligning closely with the current challenges facing fixed income investors. After four decades of declining yields, fixed income’s long tailwind ended in 2020 with the zero interest rate policy. Now, the pendulum has swung the other way, and that shift may last for years, Sujitno says. In a rising or volatile rate environment, duration – once a reliable source of risk-adjusted return – has become a liability. This is where CLOs, particularly AAA-rated tranches, come into play. “CLOs give you a higher yield than similarly rated bonds,” Sujitno says. “More importantly, they’re floating rate and reset quarterly. That low duration makes them a strong fit for portfolios going forward.”

CLOs are backed by an actively managed, diversified portfolio of corporate loans, typically made to non-investment-grade borrowers. The debt issued by CLOs is divided into tranches, with the AAA-rated layer at the top of the capital structure. These tranches have senior claim on cash flows and offer the greatest protection against defaults. “The most coveted credit rating, of course, is triple A,” Sujitno says. “Very few securities are awarded this rating.” And in the case of CLOs, history supports the designation. “Triple-A CLOs have never defaulted in history. That’s a big statement – even through the pandemic,” he emphasizes. “Not many asset classes can say that.” The combination of structural protection, yield pickup, and floating-rate reset has helped fuel the popularity of CLO ETFs in the US, particularly as advisors look to build portfolios less exposed to rate volatility while not sacrificing yield. “It’s just part of the recalibration of fixed income,” Sujitno says.

Despite their resilience, CLOs are often confused with the CDOs that fuelled the 2008 financial crisis. Sujitno is careful to draw the line. “CLOs survived the global financial crisis without defaults on AAA tranches,” he says. “It was CDOs that failed – just one letter different.” The difference lies in the underlying assets. “CDOs were backed by subprime mortgages in the US, and in the heart of 2007, most people could get a mortgage with very little qualification. That’s a recipe for disaster. When you put that into a portfolio and tranche out the debt, it’s a completely different animal,” Sujitno says. “CLOs, by contrast, are backed by corporate credit. Even during the crisis, the US leveraged loan index dropped 29 percent but rebounded 45 percent the next year. Defaults in 2009 were around 13 percent, but actual default loss was under seven percent. Mark-to-market losses affected all risk assets.”

“Triple-A CLOs have never defaulted in history. That’s a big statement – even through the pandemic. Not many asset classes can say that”

Jeff Sujitno, Wellington Square

AAA CLO ETF (BAAA) this month, with Brompton as manager and Wellington Square as sub-advisor. BAAA aims to invest primarily in high-quality AAA-rated CLO tranches. “It’s not something advisors or retail investors can access easily on their own. The ETF structure makes it practical,” he says.

“We have proprietary strategies around buying from larger versus smaller managers. The idea is to balance credit quality, liquidity, and pricing,” says Sujitno. While the BAAA fund will be heavily focused on AAA tranches (minimum 75 percent AAA at all times), it includes some flexibility to allocate up to 25 percent to other investment-grade segments such as AA, A, or BBB tranches. And when market dislocations arise, the ETF can opportunistically take advantage of mispricing across lower-rated tranches to a maximum of 10 percent of assets. “That flexibility is important. It allows us to capture value while having guardrails to manage risk,” Sujitno says. Wellington Square has been investing in CLOs since 2014, long before most Canadian firms even considered the asset class. Sujitno’s team has deployed capital across multiple mandates and market cycles, building relationships with US CLO managers and trading desks. “We’ve invested hundreds of millions into CLOs,” Sujitno says. “We know the structure, the managers, and the collateral.” That institutional expertise now underpins the strategy behind BAAA. “If an advisor wants to talk through the portfolio, we welcome that conversation. We’ve invested in the loan market for over a decade. We know what to look for.”

A hand presenting a puzzle piece fitting into a larger puzzle

Understanding the structure and appeal of CLOs

Not a trade – an evolution in portfolio construction

Published April 21, 2025

Yield (%)

Duration (years)

AAA CLO

BBB CLO

US loans

US high yield

EUR high yield

Emerging market high yield

US corporate

CAD corporate

US government

EUR corporate

CAD government

EUR government

Largest areas of the market offer lower yield with higher duration

Source: Bloomberg as of February 28, 2025. Bloomberg indices except for the Credit Suisse Leveraged Loan Index and the JP Morgan AAA and BBB CLO Indices. Used with permission of Bloomberg Finance LP

Source: S&P Global Default, Transition and Recovery 2023 Annual Study. Default rates for CLOs and corporates include all rated entities. Speculative grade corporates include only companies rated ‘BB+’ or lower

Annual global default rates for CLOs and corporate issuers

10%

12%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

CLOs

Corporates

Corporates (speculative grade)

Still, Sujitno understands the market’s hesitation. “There’s a perception that CLOs are overly complex,” he says. “And yes, there are layers. But they’re not opaque.” He likens CLOs to banks – institutions that lend money, earn interest, and fund themselves with a mix of debt and equity. “While CLOs don’t trade on an exchange, they’re part of the institutional bond market,” he adds. “People don’t see them on screens, but that doesn’t mean they’re illiquid.” Sujitno wants to make the complex more accessible, and part of this effort is the launch of the Brompton Wellington Square

Complex, yes – but not opaque

Debunking the myth: CLOs are not CDOs

Sujitno is clear: CLOs aren’t about chasing yield or timing markets. They’re about addressing structural shifts in how fixed income behaves. For Canadian advisors, Sujitno believes this moment represents more than a new product – it’s a broader opportunity to modernize how portfolios are built. “When you consider how much of the bond market is still fixed rate, CLOs bring something new to the table. They offer an ingredient that advisors haven’t needed until now, but in this environment they do,” he says. “We’re not just bringing a fund to market. We’re trying to help advisors think differently about fixed income – because the landscape has changed.”

Beyond structure, Wellington Square places a heavy emphasis on how CLO exposure is selected and managed. Sujitno’s team employs a multilayered approach to risk. “Composition is a major consideration,” he says. “You always have to look at risk-adjusted returns, and you can add an alpha overlay by making sure the underlying loans are diversified.” That means investing across vintages to gain exposure to varying loans with varying maturities. Manager selection is also critical.

Bringing institutional access to the advisor desk

Disclaimer: This article is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this article are solely those of Brompton Funds Limited (BFL) and Wellington Square Advisor (WSQ) and are subject to change without notice. BFL and WSQ makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL and WSQ assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the prospectus before investing. Commissions, trailing commissions, management fees and expenses all may be associated with exchange-traded fund investments. Please read the prospectus before investing. Exchange-traded funds are not guaranteed, their values change frequently, and past performance may not be repeated. Information contained in the article was published at a specific point in time. Upon publication, it is believed to be accurate and reliable; however, we cannot guarantee that it is complete and accurate at all times. Certain statements contained in this article constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this article and to other matters identified in public filings relating to the ETF, to the future outlook of the ETF and anticipated events or results and may include statements regarding the future financial performance of the ETF. In some cases, forward-looking information can be identified by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” “predict,” “potential,” “continue,” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

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