How Do CLOs Perform in a Downturn?

Key Takeaways:

• CLO drawdowns have historically been smaller than high yield and corporate bonds across every major downturn reviewed, with senior tranches showing the most resilience.
• The type of stress matters more than the stress itself, rate-driven and liquidity-driven downturns hit CLOs differently.
• Across all five episodes, 12-month returns following peak drawdowns were strong.

How Do CLOs Perform in a Downturn?

Collateralized Loan Obligations (CLOs) are one of the most misunderstood corners of fixed income, often grouped with broader structured products and written off as too complex during times of stress. A decade of real market data tells a more nuanced story: how CLOs perform in a downturn depends far more on the type of stress than on stress itself.

This blog examines CLO performance across five distinct market downturns: the 2013 Taper Tantrum, the 2015-2016 Oil Collapse, the Q4 2018 growth scare, the Covid liquidity shock, and the 2022 inflation sell-off; comparing results against corporate bonds, high yield, leveraged loans, and the broad corporate market. The evidence reveals a consistent pattern: CLO structures respond differently to macro shocks, and that difference has historically worked in investors' favor.

What Determines How CLOs Perform in a Downturn?

Periods of market stress are often treated as a single category, but history shows that not all downturns are the same. Over the past decade, fixed income markets have experienced a wide range of shocks, from liquidity withdrawals and deflation scares to policy mistakes and inflation-driven sell-offs. Each episode produced very different outcomes across rates, credit, and structured products.

This matters for CLOs as performance is often driven less by macro headlines and more by the type of stress in the markets. Understanding how CLOs behaved during prior downturns provides a clearer framework for evaluating their resilience.

CLO Drawdowns

Source: JP Morgan. CLO refers to the JP Morgan CLO Index. Drawdown figures are percentages. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions and important disclosures below.

We reviewed how CLOs performed across these five downturns and compared results to corporate bonds, high yield, leveraged loans, and the broad corporate market.

How Did CLOs Perform During the 2013 Taper Tantrum?

The 2013 taper tantrum was a result of a repricing of interest rate expectations as the Federal Reserve (Fed) announced a reduction in its bond purchases, rather than a deterioration in corporate fundamentals. While traditional fixed income experienced sharp price volatility as yields reset higher (the 10Y U.S. Treasury yield rose from roughly 1.6% in early May to about 2.6% by late June), CLO drawdowns were relatively modest and short-lived, particularly in the senior tranches, due largely to their price insensitivity to movements in long-term bond yields. The data below shows that CLOs recovered quickly, with lower-rated tranches posting double-digit returns 12 months after their peak drawdown.

CLO vs. Traditional Fixed Income: Taper Tantrum Drawdown & Recovery

Source: Morningstar Direct, JP Morgan, VanEck. AAA CLO represented by J.P. Morgan CLO AAA Index, AA CLO represented by J.P. Morgan CLO AA Index, A CLO represented by J.P. Morgan CLO A Index, BBB CLO represented by J.P. Morgan CLO BBB Index, BB CLO represented by J.P. Morgan CLO BB Index, B CLO represented by J.P. Morgan CLO B Index, "CLOs" represented by the J.P. Morgan CLO Index, IG CLOs represented by the J.P. Morgan CLO IG Index, AA-BB CLOs represented by the J.P. Morgan CLOIE Balanced Mezzanine Index, Corp Bonds represented by ICE BofA US Corporate Index, High Yield represented by ICE BofA US High Yield Index, Leveraged Loans represented by Morningstar LSTA US Leveraged Loan Index, and Agg represented by the ICE BofA US Broad Market. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions and important disclosures below.

How Did CLOs Hold Up During the 2015-2016 Oil Collapse?

The 2015-2016 downturn was driven by collapsing energy prices (oil fell below $30) and global growth fears, leading to significant dispersion within credit markets, with the 10Y yield falling from roughly 2.3% at the end of 2015 to about 1.6% in early 2016. High yield bonds experienced deep and prolonged drawdowns, particularly within the energy sector. CLOs proved more resilient, supported by diversified collateral pools and limited exposure to concentrated sector risk. Drawdowns were deeper than in 2013 but remained manageable, and the 12-month returns following peak stress were strong across most CLO tranches, emphasizing the need for active management.

CLO vs. Traditional Fixed Income: Oil Collapse Drawdown & Recovery

Source: Morningstar Direct, JP Morgan, VanEck. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions and important disclosures below.

Did CLOs Outperform During the Q4 2018 Market Selloff?

The fourth quarter of 2018 marked a sharp tightening in financial conditions as the Fed continued rate hikes and balance sheet reduction due to slowing global growth and the escalation of the U.S. vs. China trade war. CLOs experienced drawdowns alongside broader fixed income markets, but the magnitude was significantly smaller than in high yield bonds. Recovery was swift following the Fed's policy pivot in early 2019. Drawdown periods were relatively short and forward returns were solid, while long-duration assets such as corporate bonds benefited more directly from falling rates.

CLO vs. Traditional Fixed Income: Q4 2018 Drawdown & Recovery

Source: Morningstar Direct, JP Morgan, VanEck. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions and important disclosures below.

How Did CLOs Perform During Covid?

March 2020 was an extreme liquidity event driven by deleveraging, as price discovery deteriorated across fixed income markets. Prices declined sharply during the height of the crisis, reflecting forced selling rather than a reassessment of long-term credit fundamentals. After the Fed supported the market and restored liquidity, recoveries were quick, with 12-month returns following peak drawdowns among the strongest on record.

CLO vs. Traditional Fixed Income: Covid Drawdown & Recovery

Source: Morningstar Direct, JP Morgan, VanEck. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions and important disclosures below.

Why Did CLOs Outperform in the aggressive rate hikes and higher inflation of 2022?

The 2022 inflation-driven sell-off was different from prior downturns. Persistent inflation and aggressive monetary tightening pressured most fixed income assets at the same time. Unlike duration-sensitive bonds, CLOs benefited from higher base rates, which helped offset spread volatility and limited drawdowns relative to traditional credit. While price pressure lasted longer than in prior episodes, cumulative returns remained competitive and recoveries were steady, showing the advantages of floating-rate exposure in a rising rate environment.

CLO vs. Traditional Fixed Income: 2022 Inflation Drawdown & Recovery

Source: Morningstar Direct, JP Morgan, VanEck. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See index definitions and important disclosures below.

Are CLOs Resilient During Market Downturns?

Across five different downturns, the data show that CLO performance has been shaped less by the presence of stress and more by its source. When downturns were driven by rates, policy uncertainty, or liquidity, CLO drawdowns were generally contained and recoveries were relatively swift. Even in more severe environments, such as Covid and the 2022 inflation shock, CLO structures showed an ability to preserve long-term value.

These episodes point to a consistent theme: CLOs behave differently than traditional fixed income because their return drivers: floating-rate collateral, structural subordination, and diversified exposure, respond differently to macro shocks. That difference has, across five distinct episodes, generally been an advantage.

How Can Investors Get Exposure to CLOs?

For investors seeking liquid exposure to the CLO market, the VanEck CLO ETF (CLOI) offers a straightforward way to participate. CLOI invests primarily in investment-grade CLO tranches, targeting the senior end of the capital structure where drawdowns have historically been most contained, as the data above shows across every downturn reviewed. As the last decade shows, understanding how CLOs perform across a range of downturns can help investors better assess where they may fit within a portfolio.

For investors who want more yield potential across the CLO capital structure, the VanEck AA-BB CLO ETF (CLOB) provides access to mezzanine and junior tranches, which have historically delivered some of the strongest 12-month post-drawdown recoveries in the dataset.

For those seeking exposure further down the capital structure, the VanEck CLO Opportunities Fund (CLOIX) invests in CLO equity and junior mezzanine debt, seeking high income through active management. As the last decade shows, understanding how CLOs perform across a range of downturns can help investors better assess where each fund may fit within a portfolio.