The chase for hot yields spurred investors to pour billions into a relatively risky corner of the fixed income market in 2024. Bank loan and collateralized loan obligation (CLO) exchange-traded funds scooped up about $25.6 billion in new money last year, according to State Street. That level marked a record, and contributed to the $87 billion that went toward risk-on credit sectors last year, which include high yield and investment grade corporate ETFs. “Those loan asset class flows are supported by two trends: risk-on temperaments favoring risk taking within implicit equity-biased fixed income, as well as the positive effects on those securities’ floating-rate coupons due to the reduction in forecasted Fed rate cuts that may no longer reduce their income generation as much,” wrote Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, in a recent report. A play on ‘higher for longer’ rates With the Fed dimming its rate cut outlook to two reductions in 2025 – down from the four it predicted in September – CLOs and bank loans are expected to stay attractive in the new year. That’s because this flavor of ETFs holds floating-rate securities, which offer investors higher rates that are tied to a certain benchmark. Investors can snap up bank loans, which institutions make to companies, and benefit from the loans’ floating coupon rate. The loans themselves may be below investment grade, but they are secured by the borrower’s assets. CLOs are pools of floating rate loans to businesses, which may also be non-investment grade. An individual CLO is made up of tranches, which have their own risk characteristics. Those that are deemed AAA by ratings agencies are the first in line to get paid if a borrower goes bankrupt. Investors who are willing to dabble in these ETFs benefit from handsome yields. The Janus Henderson AAA CLO ETF (JAAA) offers a 30-day SEC yield of 5.97% and charges a net expense ratio of 0.21%. Year to date, the fund has collected nearly $1.6 billion in flows, according to FactSet. The Invesco Senior Loan ETF (BKLN) has a 30-day SEC yield of 6.42% with a net expense ratio of 0.65%. So far in 2025, BKLN has collected more than $386 million in flows, FactSet found. Rising flows are expected to continue this year, too – a turnaround from last year’s concerns that falling rates would lower the income these funds generate and dampen investor enthusiasm. When the market anticipated hefty rate cuts from the Federal Reserve running through 2025, “there was a lot of negativity built up in the asset class and fear that the carry would be removed,” Bartolini by telephone with CNBC. “Now that that’s clearly not the case, that has led to some sizable flows.” Further, the funds’ short duration – meaning their reduced price sensitivity to fluctuations in rates – have made them attractive for individuals who are looking for a place to stash some of their cash in the short term, said John Kerschner, head of U.S. securitized products at Janus Henderson Investors. “There is a use case for this product: It’s more yield than cash, and a little more volatility than cash, and we think inflows will continue,” he said. “I think it will continue as rates feel like they are headed higher here, and the Fed could be done [cutting], quite frankly.” Considerations for investors CLO and bank loan ETFs can be an attractive complement to a diversified income portfolio, but they shouldn’t make up the majority of your holdings. Heavy exposure toward short-duration instruments like these ETFs could mean you’re left out in the cold when the Federal Reserve lowers rates – and it means you’ll miss out on price appreciation that you’d otherwise get in longer-dated assets. Financial advisors have been recommending intermediate-term durations for fixed income portfolios. Intermediate-term portfolios tend to have durations of 3.5 to 6.0 years, according to Morningstar . When choosing a bank loan or CLO ETF, be sure to understand the credit quality of the underlying securities. While lower-rated tranches offer investors richer yields, they also bring an additional element of risk. As always, keep an eye on fees. Fund costs take a bite out of portfolio returns.