Two of the hottest trends in financial markets began to merge in late 2024, promising a further evolution in the democratization of private assets. Recognizing the substantial growth in private credit and its benefits for individual investors, asset managers have started offering access to these assets through exchange-traded funds (ETFs) – a hot product in their own right and now a $15 trillion market.
Collateralized Loan Obligation ETFs
In early December, two managers launched ETFs designed to primarily invest in “tranches” of collateralized loan obligations (CLOs), which are composed of private loans to mostly middle-market companies. The two ETFs are BondBloxx Private Credit CLO and Virtus SEIX AAA Private Credit CLO.
The way that CLOs operate is that they pool together loans that they make or buy from others and divide the pool of assets into slices of equity and debt called “tranches.” The CLO market has been around for many years but ETFs that invest in CLOs are relatively new. Further, until these two products were issued, the only ETF CLOs available to investors were those that invested in public high-yield bonds or broadly syndicated loans, which usually have much deeper trading markets and are more liquid.
By investing in CLOs that own private loans, these two new ETFs offer retail investors indirect exposure to private market loans which have been primarily available only to institutional investors.
Public and Private Credit ETF
State Street Global Advisors (SSGA) and Apollo Global Management (Apollo) have taken a different approach to providing retail investors access to private credit. In September, the two firms partnered and filed to launch an ETF that invests directly in public and private loans. This innovative product leverages State Street’s expertise as one of the largest issuers of ETFs and Apollo’s leadership in private credit management. Under the arrangement, Apollo will source private loans for the ETF and will offer to provide liquidity for those loans, if needed.
Since it is expected that the percentage of private loans in the State Street-Apollo ETF may exceed the regulatory limit of 15% for registered funds, some industry participants have asked the SEC to closely scrutinize the liquidity mechanism offered by Apollo, including risks associated with pricing and potential conflicts of interest.
If approved by the SEC, the product, which is called SPDR SSGA Apollo IG Public and Private Credit ETF, would be the first ETF to invest directly in private loans.
The recent and proposed ETFs will expand access to private credit assets for retail investors and offer them the potential for greater diversification and higher yields. The success of these products, however, will depend upon how they manage liquidity for portfolios of private loans, particularly during times of financial distress.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.