CLOZ vs. USHY: Evaluating Credit Income Options for Retirees in a High-Yield, High-Risk Environment

In the current financial landscape, retirees seeking income face a paradox: historically high yields coexist with elevated credit and interest rate risks. Two popular options—Eldridge BBB-B CLO ETF (CLOZ) and iShares Broad USD High Yield Corporate Bond ETF (USHY)—offer distinct approaches to navigating this environment. This article dissects their strategies, focusing on risk-adjusted returns and income sustainability, to guide retirees in choosing the optimal path for their portfolios.

The Case for CLOZ: Stability in a Volatile World

CLOZ's appeal lies in its active management of collateralized loan obligations (CLOs), a niche but robust segment of the credit market. By targeting BBB and BB-rated tranches, the fund balances income potential with credit safety. These CLOs are predominantly floating-rate instruments, meaning their yields adjust with short-term interest rates. This structure inherently limits duration risk, a critical factor for retirees averse to principal erosion during rate hikes.

Key metrics:
- Yield: CLOZ offers a forward yield of 7–7.5%, with a trailing twelve-month (TTM) yield of 8.78%.
- Duration: While not explicitly stated, its floating-rate structure implies a modified duration near 1–2 years, significantly lower than USHY's 3.13 years.
- Volatility: CLOZ's beta of 0.42 and standard deviation of 0.61% underscore its low sensitivity to market swings, making it a buffer against macroeconomic shocks.

CLOZ's active management further enhances its appeal. Portfolio managers rebalance holdings to avoid underperforming loans, ensuring consistent cash flows. This approach has yielded a 12.03% average annual return since inception in 2023, outperforming both high-yield and investment-grade benchmarks. For retirees, this translates to predictable income with minimal capital at risk.

USHY: The High-Yield Gamble

USHY, by contrast, tracks B-rated high-yield corporate bonds, a sector known for its “junk” status but also for its aggressive yields. With an ACF yield to worst of 7.25% (338 basis points over 3.00-year Treasuries), USHY appeals to investors willing to accept higher credit risk for incremental returns. However, this strategy exposes retirees to two key vulnerabilities:

1. Duration Risk: USHY's 3.13-year modified duration means its price fluctuates more sharply in response to rate changes. In a rising rate environment, this could erode capital gains.
2. Credit Risk: B-rated bonds have historically higher default rates than CLO tranches. While current spreads are tight, a credit cycle downturn could trigger defaults, disrupting income streams.

USHY's volatility metrics—beta of 0.44 and standard deviation of 0.74%—are marginally higher than CLOZ's, reflecting the inherent instability of high-yield bonds. While its 7.25% yield is attractive, retirees must weigh this against the potential for principal loss during economic stress.

Risk-Adjusted Returns: The Retiree's Sweet Spot

Retirees prioritize income sustainability over capital appreciation, making risk-adjusted returns the ultimate metric. CLOZ's low duration and active risk management position it as a superior choice for this demographic. Its floating-rate structure ensures yields remain aligned with current interest rates, preserving income even in a shifting rate environment. Meanwhile, USHY's higher yield comes at the cost of greater exposure to credit defaults and interest rate volatility, which could jeopardize a retiree's fixed-income needs.

Consider the historical performance of both funds in Q2 2025:
- CLOZ delivered a 1.80% quarterly return with minimal drawdowns.
- USHY outperformed in rising equity markets but lagged during periods of rate uncertainty.

Strategic Recommendations for Retirees

1. CLOZ as a Core Holding: For retirees prioritizing capital preservation and stable income, CLOZ's low volatility and active management make it ideal. Its yield is competitive with high-yield bonds while offering a safety net during market stress.
2. USHY as a Satellite Exposure: A smaller allocation to USHY (e.g., 10–15% of the fixed-income portfolio) could enhance yields without overexposing the portfolio to credit risk. This approach leverages high-yield bonds' upside potential while mitigating downside risk.
3. Monitor Duration and Credit Spreads: Retirees should rebalance portfolios quarterly, adjusting exposure to CLOZ and USHY based on interest rate forecasts and credit market health.

Conclusion

In a world where high yields come with high risks, retirees must choose their investments judiciously. CLOZ's floating-rate CLO strategy offers a compelling blend of income, stability, and risk control, making it a cornerstone for sustainable retirement portfolios. USHY, while tempting with its higher yield, should be approached with caution—its volatility and credit risk are incompatible with the low-margin-of-error nature of retirement income. By prioritizing CLOZ's active, low-duration strategy, retirees can navigate today's credit and rate environment with confidence.