By Joy Wiltermuth
Many investors want out of private credit, but billions of dollars are still flowing into related funds with a big software exposure
The alphabet soup of Wall Street funds are set to get more involved in financing the AI boom.
Many investors want out of private credit this year, given increased regulatory scrutiny of the sector, concerns about &#34;cockroaches&#34; and fears that AI could overtake the software industry.
The Securities and Exchange Commission, Treasury Department and bank regulators have stepped up inquiries into risks in the roughly $3 trillion private-credit sector, the Wall Street Journal reported.
Yet a surprising amount of capital has been flowing into related funds that are publicly traded and own the debt of riskier companies, including many in the software business.
These funds, known as &#34;CLO ETFs,&#34; hauled in $6 billion in investor cash this year through April 10, according to Deutsche Bank researchers. CLO refers to collateralized loan obligations.
The team called the intake &#34;remarkably robust&#34; - only slightly less than the total inflows from the second half of 2025 - and surprising, given &#34;anxiety around private credit, software, and geopolitics&#34; that has slowed demand in adjacent markets.
Weekly flows in other categories of ETFs that fund companies with below-investment-grade credit ratings have been negative this year, such as those invested in leveraged loans and high-yield &#34;junk&#34; bonds. That hasn't been the case for CLOs, as the chart below shows.
Concerns about private credit and software exposure have weakened demand in some ETF areas of credit markets this year, but not in CLOs.
Investors are uncertain about what AI could mean for software and other industries, and unsure about how to analyze those risks, said John Kerschner, global head of securitized products at Janus Henderson Investors and a manager of JAAA JAAA, the industry's largest CLO ETF.
&#34;I think the way you do it is you let diversification in the portfolio help you,&#34; Kerschner said. &#34;That's where the CLOs come in.&#34;
Software providers represent one of the largest exposures for CLOs, at roughly 10% of the assets in U.S. transactions, according to Moody's, a figure that's based on the deals it rates. The funds also own debt that finances many other industries, including banking, healthcare and hotels.
The exposure to software is closer to 25% for business development companies, or BDCs, on a median basis, making it their largest exposure, according to Moody's. BDC managers, like Blue Owl Capital (OWL), have been at the heart of conversations around this year's redemption angst in private credit.
Read: These private-credit funds are giving back less than half the money their investors want
Concerns about powerful new AI tools and their potential to replace swaths of services offered by the software industry led to panic selling in related shares in early 2026. In April, software stocks enjoyed a sharp relief rally, along with the rest of the U.S. equity market, which has reclaimed record territory on hopes for a lasting truce in the Iran war.
It's hard to ignore the piles of cash being launched at the AI build-out, however. Goldman Sachs researchers said this week that they estimate Amazon (AMZN), Alphabet (GOOGL), Meta (META) and Microsoft (MSFT) will spend $4.5 trillion in capex to fund AI data centers through the 2030 fiscal year. These companies will need to tap a mix of financing avenues, given the magnitude of the spending, they said, including leveraged loans, high-yield, private credit and banks. What the spending boom will mean for software and other industries has yet to be determined. The above companies didn't immediately respond to requests for comment.
The iShares Expanded Tech-Software Sector ETF IGV was down more 20% on the year as of recent trading on Thursday, according to FactSet. That compares with 9.5% drop for the VanEck BDC Income ETF BIZD, which tracks many BDCs facing redemption requests.
&#34;Software exposures are a developing asset risk because of the significant disruptive force that artificial intelligence (AI) presents, but one that will take multiple years to play out,&#34; Moody's said in an April 7 report about BDCs. It noted the significant wave of redemption requests hitting the sector in the first quarter as a negative.
BDCs have been around for decades, but CLO ETFs are a relatively new asset that developed after 2020. Both help finance similar types of companies - speculative or struggling businesses that are typically heavily reliant on debt. Most, but not all, CLO ETFs invest only in the top Triple-A category of debt securities, providing investors with what the Deutsche Bank team called an &#34;up-in-quality positioning during a heightened period of macro uncertainty.&#34;
That's provided investors with steady income on CLO ETFs lately, with the 1-year return of JAAA at about 5%, based on market price. That compares with a -14.7% total return for the VanEck BIZD.
-Joy Wiltermuth
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
04-23-26 1307ET

CLOA

JABS

CLOZ

Despite concerns about private credit and software exposure, $6 billion has flowed into CLO ETFs this year, indicating strong investor interest. Regulatory scrutiny and fears of AI disrupting the software industry have led to negative flows in other ETF categories. CLOs, which finance riskier companies, particularly in software, have shown resilience. Major tech firms are expected to invest heavily in AI, further influencing the market. While software stocks have faced volatility, CLO ETFs have provided steady returns, highlighting their appeal amid macroeconomic uncertainty.

Dow Jones

Blackrock AAA CLO ETF

Janus Henderson Asset-Backed Secs ETF

Panagram Bbb-B Clo ETF

Janus Henderson AAA CLO ETF

Panagram AAA CLO ETF

Invesco AAA CLO Floating Rate Note ETF

PGIM AAA CLO ETF

TCW AAA CLO ETF

VanEck AA-BB CLO ETF

VictoryShares Pioneer Asst-Based Inc ETF

Vaneck CLO ETF

Nuveen AA-BBB CLO ETF

Janus Detroit Street Trust-Janus Henderson B-BBB CLO ETF

Deutsche Bank AG

Janus Henderson

Moodys

Blue Owl Capital

Goldman Sachs

Amazon

Alphabet

Alphabet - C

Meta Platforms

Microsoft

iShares Expanded Tech Software Sector ETF

VanEck BDC Income ETF

Deutsche Bank AG Subscription Rights

Deutsche Postbank AG

Blue Owl Capital III

Blue Owl Tech Finance

GS Hldg R

Money is flooding into these ETFs, despite heavy software exposure and worries about private credit