JAAA vs. T-Bills: Is a High-Yield CLO ETF a Better Income Play in 2025?

In 2025, investors navigating a low-volatility yet economically uncertain environment face a critical decision: Should they prioritize the safety of U.S. Treasury Bills (T-Bills) or the income potential of high-yield Collateralized Loan Obligation (CLO) ETFs like the Janus Henderson AAA CLO ETF (JAAA)? This analysis evaluates both options through the lens of risk-adjusted returns and liquidity dynamics, offering actionable insights for income-focused portfolios.

Risk-Adjusted Returns: JAAA Outpaces T-Bills, but at What Cost?

JAAA has emerged as a standout performer in 2025, with a Sharpe Ratio of 3.21 and a Sortino Ratio of 4.11, significantly outpacing the AAF First Priority CLO ETF (AAA) and most high-yield alternatives. These metrics highlight JAAA's ability to deliver robust returns per unit of total risk and downside risk, respectively. By contrast, T-Bills, while offering guaranteed principal, provide minimal risk-adjusted returns due to their near-zero volatility. However, the current yield on 10-year T-Bills (4.44% as of July 2025) pales in comparison to JAAA's 30-day SEC yield of 5.45%.

The key distinction lies in volatility and drawdowns. JAAA's daily standard deviation of 1.81% is notably lower than AAA's 3.35%, and its maximum drawdown of -2.60% is virtually identical to AAA's -2.63%. This suggests JAAA offers a smoother ride than many high-yield alternatives, though it still carries more risk than T-Bills. For investors seeking capital preservation, T-Bills remain the gold standard, but their low yield may struggle to offset inflation or opportunity costs in a rising rate environment.

Liquidity Dynamics: T-Bills Shine, but CLO ETFs Adapt

Liquidity is a critical factor in uncertain markets. T-Bills, backed by the U.S. government, are among the most liquid assets globally, with negligible bid-ask spreads and near-instant redemption. This makes them a safe harbor during periods of economic stress, such as the April 2025 trade policy-driven selloff, where both stocks and bonds declined. However, T-Bills' liquidity comes at the cost of yield compression, as their returns are heavily influenced by the Federal Reserve's rate policy.

JAAA, on the other hand, offers structural liquidity through its diversified portfolio of 390 North American CLOs, with 90% in AAA-rated tranches. While CLO ETFs are not as liquid as T-Bills, JAAA's active management and focus on shorter-dated maturities (3–7 years) enhance its resilience. The fund's 0.20% expense ratio further strengthens its appeal, outperforming T-Bills in yield while maintaining a lower cost basis.

Economic Uncertainty: A Tailwind for CLOs, a Tailwind for T-Bills?

The 2025 economic landscape is marked by stagflation risks, shifting trade policies, and inflation expectations. T-Bills traditionally act as a safe haven during market turmoil, but recent events—such as the simultaneous sell-off in equities and bonds—have eroded their diversification benefits. Meanwhile, JAAA's exposure to high-yield CLOs, which are structurally protected by senior tranches, offers a compelling alternative.

Historical data supports this: When global high-yield bonds trade at yields above 7%, as they do in 2025, there is a 90% probability of positive returns over the next 12 months. JAAA's 5.45% yield aligns with this trend, offering a balance between income and downside protection. T-Bills, while secure, lack the yield uplift to justify their inclusion in income-heavy portfolios unless paired with a tactical allocation to higher-yielding assets.

The Verdict: Strategic Allocation Over Binary Choice

For investors prioritizing capital preservation and liquidity, T-Bills remain indispensable, particularly in volatile environments. However, those seeking income growth without sacrificing stability should consider a strategic allocation to JAAA. Its superior risk-adjusted returns, competitive yield, and active management make it a compelling alternative to traditional fixed income.

A balanced approach might involve allocating 40% to T-Bills for liquidity and 60% to JAAA for income and moderate risk. This hybrid strategy leverages the strengths of both while mitigating their weaknesses. As the Fed navigates rate cuts in the latter half of 2025, such a portfolio could capitalize on rising CLO yields while maintaining a safety net.

Conclusion

In 2025's low-volatility but economically uncertain climate, JAAA emerges as a superior income play for investors willing to tolerate moderate risk. Its high Sharpe ratio, lower volatility than peers, and alignment with historically favorable yield levels position it as a viable alternative to T-Bills. However, T-Bills retain their role as a liquidity cornerstone. The optimal strategy lies in blending both, ensuring a balance between safety and yield in a dynamic market.

Investment Advice: Consider increasing exposure to JAAA if your portfolio's duration aligns with its 3–7 year maturities and you're comfortable with the fund's credit risk profile. For conservative allocations, maintain a core position in T-Bills to hedge against macroeconomic shocks. Always monitor the 10-2 yield spread and Fed policy shifts, which could alter the risk-reward equation.