A Smarter Way to Earn High-Quality Income: Why BMO GAM Thinks ZAAA Could Be a Portfolio Game-Changer

CLOs—Collateralized Loan Obligations—have been a go-to strategy in the institutional fixed income world for years. But if you're an advisor or investor in Canada, chances are they're still flying under your radar. That’s starting to change.

In a recent episode of Views from the Desk¹, BMO GAM’s Zayla Saunders sat down with Mark Jarosz, Head of Credit Alternatives, to break down what CLOs are, how they work, and why BMO’s new ETF—ZAAA—is bringing this institutional-grade strategy to everyday portfolios.

“This ETF, ZAAA, or some call it Zaaah,” Saunders jokes, “offers a slice of the triple-A-rated CLO market, and it might just be the perfect topping to your portfolio.”

Let’s unpack what makes this overlooked asset class tick—and why now might be the right time to pay attention.

First Things First—What Exactly Is a CLO?

Jarosz lays it out simply:

“The easiest way to think about a CLO is to think of it as being similar to a simplified bank with only one business line, being corporate loans.”

CLOs are portfolios made up of hundreds of floating-rate, first-lien loans, typically to companies backed by private equity firms. They're actively managed, diversified, and structured into layers—or "tranches"—that each carry different levels of risk and return. At the top of that stack is the AAA-rated tranche, and that’s where ZAAA focuses.

“These liabilities are rated from AAA being the highest all the way down to single B, and then there’s even an equity tranche,” Jarosz explains. “And that’s the focus of our newest fund here at BMO GAM.”

CLOs Aren’t CDOs—Let’s Clear That Up

Thanks to movies like The Big Short, CLOs often get confused with CDOs, which imploded during the 2008 crisis. Jarosz is quick to correct that.

“The movie is about CDOs, not CLOs… CLOs own highly diversified pools of senior secured loans to large US businesses.”

The difference? CLOs survived the 2008 crash—and every crisis since.

“There have been no defaults and no downgrades over [CLOs’] thirty-year history,” Jarosz says. “CLOs added more enhancements by increasing the level of subordination, thus making the triple-A tranche even more robust and thus more attractive.”

Why the AAA Tranche Is So Well Protected

One big reason CLOs have held up? The way cash flows are distributed.

“Triple A tranches are situated at the top of the waterfall payment, meaning they rank first,” Jarosz explains. “They’re the first to get paid interest and principal.”

If any defaults happen, losses are absorbed by the lower-rated tranches first. That’s a huge safety net.

“Given the amount of subordination and enhancements,” he emphasizes, “[AAA tranches] are very well protected.”

Built-In Hedge Against Rate Hikes

With interest rates in flux, CLOs offer another key edge: they’re floating rate, not fixed. That means they adjust with the market.

“The other big element… is the lack of interest rate risk given the floating rate nature of CLOs,” Jarosz says. “So one can take a portion of their portfolio and remove that interest rate risk… without giving up on yield.”

Translation? You don’t have to sacrifice income just to stay safe in a rising rate environment.

So What’s the Catch?

Jarosz doesn’t dodge the question. Instead, he leans into CLOs’ long-standing resilience.

“CLOs have been around for well over thirty years. They have performed quite well… through COVID, and also through the global financial crisis.”

And critically:

“No AAA CLO tranches have experienced any defaults or downgrades… this speaks to the skill of the underlying portfolio managers… coupled with the degree of subordination.”

The main risk isn’t the structure—it’s making sure you’re working with managers who know what they’re doing. That’s where BMO GAM’s due diligence and active management come in.

Making Institutional Tools Retail-Friendly

ZAAA gives retail investors direct access to the top-tier, AAA-rated CLO market—without needing to be an institution.

“This market is developing and is very popular overseas, but in Canada, it’s not as widely known,” Saunders notes. “Now we can own them.”

Jarosz points out that while the total AAA CLO market is about $650 billion, only 4–5% is in ETF form. And that’s changing quickly.

“There’s currently about anywhere from a billion… up to two billion in flows on a weekly basis,” he says.

Add in full transparency—investors can actually see the loans held inside the CLO portfolios—and you get a rare combo of liquidity, insight, and quality.

“We… have the ability to see every loan that the CLO portfolio manager invests in… several thousand of underlying loans that we get to look into.”

What You’re Really Getting with ZAAA

Jarosz sums it up:

“One is getting access to an extremely highly diversified portfolio of loans and credit with very low correlation to other instruments. One is getting access to what has predominantly been an institutional credit product.”

Saunders adds the punchline:

“Number one, diversification. Two, democratization of CLOs now being in ETF form available for end-investors.”

And for those wondering if they’ve missed the boat, Saunders is clear:

“We’re all very excited here at BMO GAM to be able to bring this solution to market and to help educate investors on the benefits of CLOs in their portfolio.”

The Final Word

BMO’s ZAAA ETF puts AAA-rated CLO exposure—once reserved for institutional buyers—within reach for Canadian investors. With strong built-in protection, floating-rate income, and a transparent structure, it’s a compelling way to earn quality yield without stepping into risky territory.

For advisors and investors looking to shore up their income strategy with something resilient and refined, ZAAA might just be the missing piece.

Disclaimer: This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Footnotes:

1 BMO ETFs. Views from The Desk.  "Podcast: An Intro to CLOs." BMO ETF Dashboard. 21 May 2025.

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