High-Yield Junk Bond ETFs as a Strategic Yield Play in a Rising Rate Environment

In an era of persistent inflation and aggressive central bank tightening, income-focused investors are increasingly turning to high-yield strategies to combat the erosion of bond prices and the diminishing returns of cash. Two prominent contenders in this space are the BondBloxx CCC ETF (XCCC), which targets the riskiest segment of the corporate bond market, and Collateralized Loan Obligation (CLO) funds, which pool leveraged loans into structured tranches. Both offer compelling yields but diverge sharply in risk profiles, making their strategic value contingent on market conditions and investor risk tolerance.

XCCC: The High-Risk, High-Reward Proposition

The BondBloxx CCC ETF (XCCC) has emerged as a standout performer in rising rate environments, delivering a 14.74% total return over the past 12 months as of July 2025, with a Sharpe ratio of 1.26 and an annualized yield of 11.24% [1]. Its focus on CCC-rated U.S. high-yield bonds—a slice of the market often overlooked due to its elevated default risk—has paid off in a tightening credit cycle. The fund’s active management and emphasis on cash-pay bonds (which reduce refinancing risks) have helped mitigate some of the volatility inherent in this asset class [1].

However, the rewards come with significant caveats. CCC-rated issuers default at an annual rate of ~4.2%, and U.S. corporate default risk has surged to a post-financial crisis high of 9.2% as of May 2025 [2]. XCCC’s non-diversified structure and concentration in subinvestment-grade bonds amplify its exposure to credit events, particularly as rising rates increase refinancing costs for issuers [2]. With an annualized volatility of 9.59% [1], XCCC balances yield capture with downside risk, but its performance hinges on the resilience of the weakest links in the corporate bond universe.

CLOs: The Structured Alternative

CLO funds, by contrast, offer a more nuanced risk-reward profile. These vehicles pool leveraged loans into tranches, with senior tranches historically enjoying near-zero default rates and junior tranches (equity) offering higher yields. Over a 10-year horizon, BB-rated CLOs have cumulative impairment rates of just 3.1%, compared to 15.4% for similarly rated corporate bonds [3]. This structural advantage—rooted in the senior secured nature of leveraged loans—has made CLOs a favored alternative to high-yield bonds, particularly in volatile markets.

In a rising rate environment, CLOs benefit from floating-rate coupons that adjust with interest rates, providing a natural hedge against inflation. However, the recent shift to a dovish monetary policy has introduced new dynamics. Spreads in the CLO market tightened in 2024, driven by improved credit fundamentals and a surge in CLO ETF assets under management (AUM), which grew from $2.25 billion in 2023 to $20 billion by year-end [4]. While this compression boosted returns for equity tranches, it reduced yields for debt investors and created challenges for CLOs reliant on stable spreads.

Strategic Considerations for 2025

The choice between XCCC and CLOs ultimately depends on an investor’s appetite for volatility and their view on credit cycles. XCCC’s performance in 2023–2025 underscores its potential as a speculative yield play, but its exposure to CCC-rated issuers makes it vulnerable to further rate hikes or economic downturns. CLOs, meanwhile, offer a more diversified and structurally resilient approach, though their complexity and sensitivity to spread movements require careful monitoring.

For investors seeking asymmetric returns, XCCC’s high yield and active management may justify its risks in a controlled allocation. For those prioritizing stability, CLOs’ lower default rates and floating-rate structure provide a more predictable path to income generation. As the Federal Reserve navigates the delicate balance between inflation control and economic growth, both strategies will need to be reevaluated in light of evolving market conditions.

Source:
[1] Why BondBloxx CCC ETF's $0.3334 Monthly Dividend ... [https://www.ainvest.com/news/bondbloxx-ccc-etf-0-3334-monthly-dividend-signals-strategic-buy-income-seeking-investors-rising-rate-environment-2509/]
[2] US firms' default risk hits 9.2%, a post-financial crisis high [https://www.moodys.com/web/en/us/insights/data-stories/us-corporate-default-risk-in-2025.html]
[3] What's Next for CLOs? [https://www.vaneck.com/us/en/blogs/income-investing/whats-next-for-clos/]
[4] Outlook for CLOs in 2025 – reason for optimism? [https://flow.db.com/trust-and-agency-services/outlook-for-clos-in-2025-reason-for-optimism]