Private Credit ETFs: Income and Diversification in a Rising Rate World

In an era of persistent inflation and aggressive Federal Reserve rate hikes, investors are increasingly seeking income-generating assets that can withstand rising interest rates while offering diversification benefits. Private credit, once a niche corner of the alternative asset class, has emerged as a compelling solution. The Virtus Seix AAA Private Credit CLO ETF (CLOX) exemplifies this trend, delivering a robust monthly distribution of $0.1206 per share in August 2025—a 21.16% increase from the prior monthDividend History | CLOX Eldridge AAA CLO ETF payout date^[2]—while maintaining a 5.60% dividend yield over the past yearPanagram AAA CLO ETF (CLOX) - Stock Analysis^[5]. This performance underscores the potential of collateralized loan obligation (CLO) ETFs to serve as a stable income source in a challenging macroeconomic environment.

The Mechanics of CLO ETFs in Rising Rates

CLOs, the core holdings of funds like CLOX, are structured products that pool corporate loans and issue tranches with varying risk profiles. The AAA-rated tranches, which dominate CLOX's portfolioVirtus Seix AAA Private Credit CLO ETF^[1], are particularly attractive for income-focused investors due to their high credit quality and floating-rate characteristics. As the Federal Reserve raised the federal funds rate from 0.33% in April 2022 to 5.33% by August 2023Federal Funds Rate History 1990 to 2025 – Forbes^[6], the floating-rate nature of CLOs allowed them to adjust to higher borrowing costs, preserving yields for investors. This dynamic contrasts with traditional fixed-income assets, which often see price declines in rising rate environments.

CLOX's performance metrics further reinforce its resilience. Over the past 12 months, the ETF has delivered a total return of 5.86%Panagram AAA CLO ETF (CLOX) - Stock Analysis^[5], outpacing the S&P 500's 3.2% return during the same periodStock Market Performance During Previous Fed-Rate-Hike Cycles^[4]. Its Sharpe ratio of 1.12 and Sortino ratio of 1.37Panagram AAA CLO ETF (CLOX) - Stock Analysis^[5] highlight its ability to generate returns with lower volatility compared to broader equity markets. These risk-adjusted metrics suggest that CLOX's exposure to private credit offers a unique balance of income and capital preservation, even as traditional asset classes face headwinds.

Diversification in a Correlated World

A critical question for investors is whether CLO ETFs provide meaningful diversification in a rising rate environment. While explicit historical correlation data between CLOX and traditional assets like the S&P 500 or U.S. Treasury bonds remains limitedAsset Correlations - Portfolio Visualizer^[7], indirect evidence points to potential benefits. For instance, CLOX's Sharpe ratio of 1.12 exceeds the S&P 500's 0.94Panagram AAA CLO ETF (CLOX) - Stock Analysis^[5], implying that its returns are less volatile relative to risk. This suggests a lower correlation with equities, which often experience sharp swings during rate hikes.

The relationship with Treasury bonds is more nuanced. Rising rates typically depress bond prices, but CLOX's floating-rate structure insulates it from this dynamic. While no direct correlation data exists for CLOX and Treasury ETFs like EDVHow Rising Interest Rates Change the Relationship^[8], the ETF's performance during the 2022–2025 rate hike cycle—marked by a 0.14% price increase over 12 monthsFederal Funds Rate History 1990 to 2025 – Forbes^[6]—indicates that it may behave differently from long-duration bonds. This divergence could enhance portfolio resilience, particularly as investors seek to hedge against the synchronized volatility of stocks and bonds observed in recent yearsPCLO Dividend History, Dates & Yield - Stock Analysis^[3].

A Comparative Edge: CLOX vs. PCLO

CLOX's income generation also distinguishes it from peers. The Virtus Seix AAA Private Credit CLO ETF (PCLO), another CLO-focused ETF, has an annual dividend of $1.03 per share and a yield of 4.13%PCLO Dividend History, Dates & Yield - Stock Analysis^[3], trailing CLOX's $1.43 annual payout and 5.60% yieldPanagram AAA CLO ETF (CLOX) - Stock Analysis^[5]. This gap reflects CLOX's active management strategy, which emphasizes high-quality AAA tranches and rigorous manager researchVirtus Seix AAA Private Credit CLO ETF^[1]. For income-focused investors, the higher yield of CLOX represents a tangible advantage, particularly in a world where traditional dividend-paying stocks and bonds offer less compelling returns.

Risks and Considerations

Despite its strengths, CLOX is not without risks. The ETF's performance is tied to the health of the middle-market loan sector, which could face stress if economic conditions deteriorate. Additionally, while the fund's AAA tranches are less volatile than lower-rated CLO slices, they are not immune to credit events. Investors must also weigh the ETF's 0.20% expense ratioPanagram AAA CLO ETF (CLOX) - Stock Analysis^[5] against its yield, though this cost is competitive with other alternative income strategies.

Conclusion

As the Federal Reserve continues to navigate the delicate balance between inflation control and economic growth, private credit ETFs like CLOX offer a compelling dual benefit: income generation and diversification. The fund's recent $0.1206 monthly distributionDividend History | CLOX Eldridge AAA CLO ETF payout date^[2], combined with its strong risk-adjusted returns and floating-rate structure, positions it as a resilient option for investors seeking to hedge against rising rates. While direct correlation data with traditional assets remains sparse, the available metrics suggest that CLOX can complement portfolios in ways that stocks and bonds cannot. For those prioritizing yield and stability, the case for private credit exposure through CLO ETFs is increasingly hard to ignore.