Get from AAA to BBB with High Income Investment-Grade CLOs

Get from AAA to BBB with High Income Investment-Grade CLOs

October 16, 2025

Funds in focus: Brompton Wellington Square AAA CLO ETF, Brompton Wellington Square Investment Grade CLO ETF

Floating-Rate Solutions for an Uncertain Policy Path

On September 17, 2025, the U.S. Federal Reserve (the “Fed”) began its latest rate-cutting cycle, citing signs of weakness in the U.S. economy. Markets are now pricing in further cuts over the coming months. However, the outlook remains far from certain: newly imposed U.S. tariffs are not yet fully reflected in inflation data. If tariffs push consumer prices higher, the Fed could be forced to hold rates where they are or even raise rates again.

This combination of potential economic slowdown alongside inflationary risks underscores just how uncertain the path for interest rates has become. In this environment, floating-rate debt, such as collateralized loan obligations (“CLOs”), stands out as a prudent way for fixed income investors to position portfolios by helping to capture attractive yields with high credit quality, while reducing sensitivity to interest rate volatility.

Why CLOs? Why now?

CLOs combine floating-rate coupons with structural credit protections, making them a compelling solution for investors navigating today’s uncertain rate environment. Two key features strengthen the case for CLO allocations:

Ultra-Low Duration: With a duration of approximately 0.25 years¹, CLOs are far less sensitive to rising interest rates than traditional fixed coupon bonds. This short reset profile provides investors with resilience against surprise rate increases, while capturing higher coupons when base rates move up.
Attractive Yields/Spreads: CCLOs continue to offer meaningful yield premiums relative to traditional fixed income investments. As of September 26, 2025, the AAA CLO Index yielded 5.66%, representing a spread of 113 bps over 3-month term SOFR, while the BBB CLO Index yielded 7.67%, a spread of 312 bps². These spreads provide an “income cushion” that makes CLOs especially attractive when base rates decline.

CLOs offer Attractive Yields Relative to Traditional Bonds³

The combination of floating coupons, very short duration, and generous spreads positions CLOs as both a defensive holding in rising rate environments and an opportunistic source of income when rates are falling.

Building on BAAA’s Success

Brompton and Wellington Square launched Brompton Wellington Square AAA CLO ETF (TSX: BAAA) on April 22, 2025, designed to provide capital preservation and steady income through an actively managed portfolio of primarily AAA-rated CLOs. The fund has already grown to CAD $120 million⁴, underscoring investor demand for high-quality CLO exposure.

To complement BAAA, Brompton has introduced Brompton Wellington Square Investment Grade CLO ETF (TSX: BBBB). BBBB expands the toolkit by offering higher income potential through diversified exposure to investment-grade CLO tranches (being CLOs rated BBB- or higher) (“Investment Grade CLOs”), with the ability to hold up to 25% in non-investment grade tranches (being CLOs rated BB+ to B-) (“Non-Investment Grade CLOs”). Importantly, Investment Grade CLOs have experienced no defaults over the past 15 years⁵, underscoring the strong credit fundamentals of the asset class.

Positioning BAAA vs BBBB⁶

Use Cases for Investors

BAAA (AAA CLO ETF):

Capital preservation with higher yield relative to government or corporate bonds.
Higher income alternative to typical HISAs or money market funds when cash is allocated for longer periods. There is a meaningful yield pick-up in CAD and US dollars.
Could be a core fixed income holding for stability-seeking investors.

BBBB (Investment Grade CLO ETF):

A high-income allocation that maintains a primarily investment-grade profile while capturing additional yield through a small exposure to non-investment-grade CLOs.
Could be a substitute for traditional investment-grade corporate credit funds, with higher yields and floating-rate coupons.
A choice for investors who expect credit conditions to remain constructive and want to position for one of the highest-yielding, long-only investment-grade fixed income ETFs available in Canada⁸.

Brompton’s Approach

With Wellington Square Advisors Inc. as sub-advisor, Brompton’s CLO ETFs benefit from active management, disciplined credit selection, and deep CLO expertise. By offering both AAA-focused (BAAA – Brompton Wellington Square AAA CLO ETF), and broader investment-grade exposure (BBBB – Brompton Wellington Square Investment Grade CLO ETF), Brompton enables investors to strengthen fixed income portfolios with attractive income and diversification across uncertain interest rate and credit environments.

¹ Bloomberg, Wellington Square Advisors, as of September 30, 2025.
² J.P. Morgan AAA CLO Index, J.P. Morgan BBB CLO Index, as of September 26, 2025.
³ Bloomberg, as of 9/16/2025. Bloomberg indices except for the S&P UBS Leveraged Loan Index and the J.P. Morgan AAA and BBB CLO Indices. Used with permission of Bloomberg Finance L.P. Credit ratings for each index is based on the lower bound of the index’s credit quality range classification as of 9/16/2025.
⁴ Morningstar Direct as of September 30, 2025.
⁵ S&P Global Ratings, as of 5/6/2025 for CLO data. CLOs: 15-year cumulative defaults by original rating category, 2010-2024.
⁶ Brompton Funds as of September 30, 2025.
⁷ JPM CLOIE AAA & BBB Indices. Source: Bloomberg, as at 30/09/2025. Portfolio yield is before taking into the account the MER and TER of the Fund.
⁸ Morningstar, as of September 30, 2025. Excludes option-based fixed income ETFs.

This report 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 report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL 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 applicable 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 this document 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 or current at all times. Certain statements contained in this document constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this document and to other matters identified in public filings relating to the ETFs, to the future outlook of the ETFs and anticipated events or results and may include statements regarding the future financial performance of the ETFs. 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.

Chris Cullen

Senior Vice President, Head of ETFs

Joining Brompton Group in March of 2006, Mr. Cullen is a CFA charterholder and is a member of the Toronto CFA Society. He graduated with a Bachelor of Applied Science in Chemical Engineering and Applied Chemistry from the University of Toronto and a Master of Business Administration from the Rotman School of Management, University of Toronto.

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