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As I consider safe income options for yield seekers in 2025, the overall market environment is still very positive. Just a few years ago, it would have been impossible to find a 5% yield without venturing into junk bonds or some other form of high risk debt or equities.

Today, that problem doesn’t exist. Sure, ultra short-term yields aren’t quite as high as they used to be, but you can still capture a 4.2% yield from the iShares Treasury Floating Rate Bond ETF (TFLO), which comes with virtually zero credit or duration risk. Pivot over to the iShares Floating Rate Bond ETF (FLOT), which incorporates investment-grade corporate bonds, and you can get a 4.9% yield with modest additional credit risk.

In other words, the opportunities are definitely still there.

One asset class that has gotten a lot of attention over the past year is CLOs or collateralized loan obligations. These aren’t traditional bonds though. These are structured products backed by pools of leveraged loans. Because these securities come with an additional degree of credit risk and a lower degree of liquidity, their yields are typically higher than those of traditional Treasury bills. If you stick to the very highest credit quality tranches of CLOs, you can capture more than an extra 1% of yield with minimal additional risk.

This category is most popularly captured by the Janus Henderson AAA CLO ETF (JAAA) and its yield of nearly 6% as of year-end 2024.

JAAA vs. Treasury Bills

When considering JAAA vs. a traditional Treasury bill or bond ETF, it’s important to look beyond the ultra-high credit ratings. If you can get a 6% yield with JAAA and a 4.2% yield with TFLO, it can be easy to assume that the extra 1.8% yield might essentially be a freebie.

In the world of investing, higher yield almost always comes with higher risk, whether you can easily identify what that risk is or not. More on that in a second, but first let’s get a lay of the land and compare JAAA to TFLO and FLOT.

Over its lifetime, JAAA has consistently offered a 100+ basis point yield premium to TFLO. FLOT has pretty much fallen right in between the two due to the additional credit risk versus TFLO, but the higher liquidity benefit versus JAAA. Given that all three ETFs come with very little share price volatility, the extra yield has translated into higher longer-term total returns.

Over the past two years, the volatility and performance of the three funds has been a virtually uninterrupted straight line higher. That’s because there’s been very little market volatility to speak of, especially to the downside.

In a low volatility environment, JAAA has historically been a great way to get a low risk yield boost. But as you can start to see in the performance chart above, things get more dicey when the market doesn’t cooperate.

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JAAA vs. TFLO vs. FLOT: Investment Risks

Credit Risk

• Treasury bills are U.S. government issued and are generally considered risk-free since the government can always just issue more debt to pay back the interest and principal as needed.

• Corporate floaters are bonds of varying credit qualities whose rates reset on a regular basis. For that reason, their interest rate risk is virtually nothing, but they can come with varying degrees of credit risk depending on the composition of the fund.

• AAA-rated CLOs typically consist of leveraged loans, not bonds. Since leveraged loans are usually issued by companies with low credit quality. Focusing on AAA ratings helps take a lot of that risk away, but there is still the potential for defaults.

Liquidity Risk

• There is a heavily tradable and highly liquid market for Treasuries. New issues are constantly be introduced to the market, so the supply is steady.

• Floating rate notes also have a highly liquid market, although not quite as liquid as that for Treasuries. Still, this is not a concern for most issues.

• The market for CLOs is much thinner. JAAA is a $20 billion fund and that may give them impression of high liquidity in the ETF shares, but the underlying securities held by the portfolio could still be illiquid. That makes them prone to declines in down markets if the liquidity in leveraged loans dries up.

Interest Rate Risk

• Because the yields on the Treasuries held by TFLO adjust according to market conditions, there is very little, if any, duration risk. Liquidity also means that trading spreads are minimal.

• The same applies to corporate floating rate bonds in terms of yield risk. The market for this group is a little less robust, but trading costs are usually minor at worst.

• The CLO market is much less liquid, which means trading costs can be higher. If market conditions go south, trading can be difficult making spreads even more costly.

Economic Risk

• Treasury bills are considered to be among the safest assets in the world. In good times, there’s usually a steady stream of demand. In worse times, investors often flee to T-bills as part of a flight to safety.

• Corporate bonds tend to react more negatively to deteriorating economic conditions, even those that are highly rated. In a risk-off environment, there’s more loss potential.

• CLOs tend to be much more sensitive to economic cycles. Especially in downturns, the inherent risk of default in leveraged loans could impact even the highest rated securities of the bunch.

Bottom Line

In normal market conditions when the VIX is low and market sentiment is average to positive, JAAA represents a good yield alternative to Treasury bills and investment-grade corporate floaters. AAA-rated securities, even in CLOs, present little credit risk and volatility is usually very low.

In down markets, however, the JAAA vs. TFLO vs. FLOT debate gets more interesting. The yield advantage can be offset by the downside potential of less liquid CLOs. This was on display in 2022 as conditions were fixed income turned more treacherous.

In the current environment, I’d prefer JAAA over the other two ETFs. If conditions turn more volatile, it might be worth making the switch to TFLO.

Mid-Week Market Thoughts

• Tariffs continue to be used as a political bargaining tool and nothing more. I think the risk that tariffs will result in long-term inflation risk and recession risk are minimal if not non-existent at this point. The White House has shown little indication that they apply tariffs long-term in order to reshore American business. The volatility caused by short-term trade war rhetoric should largely be ignored at this point.

• Long-term Treasuries (TLT) are still looking good this week. The 10-year Treasury yield is down 35 basis points, which I think could be the market unwinding some of its inflation expectations. The flight to safety pulse still looks mixed here. Healthcare (XLV) is the sector I’m still watching most closely here. It’s one of the best-performing sectors year-to-date and, given its history as a risk-off indicator, would be a big warning the longer than it outperforms the S&P 500.

• Lawmakers look like they’re pushing a bill to ban DeepSeek from being used on government devices. This isn’t surprising and I talked about this being a potential outcome not long ago. My take on DeepSeek is that it’s an interesting development in the AI space, but not the game changer that some thought it could be when it first made headlines. Good for the magnificent 7 stocks (MAGS) as long as they can navigate the earnings season.

• Not much else is really moving the markets at the moment. It seems there’s more watching and digesting than anything. The VIX is low and that’s generally a good sign for large-caps.