Although they are not yet included in 401(k) plans, private-credit exchange-traded funds are Wall Street’s most recent attempt to make private assets accessible to the general public and eventually included in retirement plans.
At least three ETF creators have introduced funds intended to access private credit, either directly or through collateralized loan obligations: StateStreet, BondBloxx, and Virtus.
With yields of up to about 10%, which are significantly higher than those of publicly traded debt instruments like bonds or Treasurys, these funds represent the most recent attempt to make a well-liked Wall Street product accessible to retail investors. They will enable them to buy and sell with ease in the $1.6 trillion private market for loans made by nonbank lenders to medium-sized businesses.
Does that sound alluring? The hitch is this: How will assets that are difficult to appraise and difficult to sell fare in a fund wrapper that is constantly traded on a public exchange? Stated differently, are assets with lower liquidity suitable for an ETF wrapper?
As the distinctions between liquid and illiquid, public and private, transparent and opaque, become more hazy, the emergence of these private-credit instruments is alarming market watchers. Through mutual funds or exchange-traded funds (ETFs), an asset class that was previously only available to wealthy institutions is now being sliced, repackaged, and marketed as a quick income fix for yield chasers. This change could make these products dangerous and even dangerous for regular investors.
In any case, what is private credit?
Private credit is the term used to describe loans that are negotiated privately between nonbank financial organizations and borrowers, usually small to medium private businesses.
Private-credit loans are rarely sold on the secondary market and are frequently less liquid than public debts like corporate bonds, which may typically be priced daily even though they are not traded on exchanges. This makes it more difficult for investors to rapidly exit them, particularly during periods of market stress, and makes them more difficult to evaluate on a daily basis.
Paul Olmsted, senior analyst of fixed-income strategies at Morningstar, advised investors to exercise extreme caution when it comes to the asset/liability mismatch in private-credit ETFs. “An investment that technically should be longer-term, less liquid, is perhaps not appropriate in a daily liquid vehicle,” he told MarketWatch via phone.
However, because they are unable to trade in and out of the fund with ease, these ETFs “are not attracting as many retail investors as you might think,” he continued.
How these assets fit into the current regulatory frameworks is another issue brought up by the possible liquidity mismatch.
ETFs and other U.S.-based open-end funds have been prohibited by the Securities and Exchange Commission since 2016 from holding more than 15% of their assets in illiquid assets. The liquidity rule, as it is known, attempts to control liquidity risk and guarantee that funds can fulfill redemption commitments, allowing investors to effortlessly add or exit holdings without materially impacting the fund’s price.
ETF issuers are launching products that challenge the bounds of what is acceptable in an effort to find methods around that regulation.
The private-credit ETF offered by State Street
State Street (STT), one of the biggest ETF managers in the world, stated that its private-credit exposure for the ground-breaking SPDR SSGA IG Public & Private Credit ETF PRIV is anticipated to be between 10% and 35% of the portfolio. However, it has made an effort to address this liquidity issue by collaborating with Apollo Global Management (APO), one of the biggest private-credit managers globally.
As part of this agreement, Apollo has committed to provide bids of up to 25% per day and 50% per week, or to repurchase the fund’s private-credit holdings at State Street’s request. Its private-credit holdings might therefore be categorized as liquid and so not subject to the 15% illiquid-asset limit.
Treasury securities, agency mortgages, and public corporate debt accounted for the majority of PRIV’s assets as of July 31. Approximately 22% of the fund is allocated to “Apollo-sourced investments,” as stated on the fund’s website.
A “narrower” definition of private credit that emphasizes direct lending and illiquid private placements is important to keep in mind, according to Aniket Ullal, head of ETF research and analytics at CFRA Research. This means that not all Apollo sources, but only roughly 7% of the fund, are in “true private credit.” Ullal mentioned the fixed-income data and analysis company Solve.
Executive vice president and chief business officer Anna Paglia of State Street Investment Management, however, believes that PRIV is “not designed” to be a private asset ETF; rather, it offers investors additional yields by “having a segment of the portfolio invested in private loans.”
In contrast to the initial excitement around its launch in late February, the eagerly awaited PRIV did not take off until very recently. According to FactSet statistics, the fund has seen net inflows of about $90 million since June, after a sluggish start, and currently manages $145 million.
“The uptick in net inflows is the result of a number of clients, especially mutual funds and smaller RIAs, making their own allocation and getting comfortable with the track record of this fund that has now been in market for five or six months,” Paglia told MarketWatch via telephone on Monday.
“In reality, we never thought that these funds would generate assets straight out of the gate, so we always have an expectation of a slow growth and a slower uptick in flows,” she stated.
Regarding the abrupt increase in net inflows over the previous month, Apollo chose not to comment.
According to FactSet data, PRIV’s expense ratio is 70 basis points, whereas the SPDR S&P 500 ETF Trust SPY, the company’s largest and most actively traded fund, has an expense ratio of 9 basis points.
According to a May SEC filing, State Street is also preparing the SPDR SSGA Short Duration IG Public & Private Credit ETF, a second ETF that offers exposure to private debt that Apollo may also source.
Industry leaders contend that the traditional distinction between public and private debt is becoming more hazy, even as regulators attempt to make it clearer what constitutes illiquid debt.
In an interview with CNBC late last year, Marc Rowan, CEO of Apollo Global Management, stated that he believes investors won’t be able to distinguish between public and private credit in a year because some public corporate bonds are already illiquid and can take up to five days to sell during stressful times.
There will not be any differences in issuers, ratings, sizes, or even liquidity. According to Rowan, the private market will soon have access to all of the fixed-income products found in the public markets, including repo, borrowing, easy leverage, ratings, and daily pricing. “When you think that 80% of the U.S. companies with over $100 million in revenues are privately held, not public, why would you exclude yourself from that much of the marketplace?”
The concept of a “liquidity discount” in private credit will “disappear,” according to Rowan, as “there’s not going to be appreciable differences in liquidity” between private and public assets. Because of this, he added, the old market notions that private assets somehow equate to risk or that “private” implies a company’s size are going to be seen quite differently than they were in the past.
Trump supports business efforts to grant access to private loans for 401(k)s.
Regulators are reevaluating the amount of exposure to private markets that retirement savings should be permitted to take, which coincides with the introduction of private-credit ETFs this year. On June 25, the SEC’s Office of the Investor Advocate declared that “Private Market Investments in Retirement Accounts” will be its top priority for 2026.
Meanwhile, the Trump administration and some of the biggest asset managers on Wall Street have made it a priority to include private securities in 401(k) menus. According to a press statement last month, BlackRock (BLK), the biggest asset manager in the world, is getting ready to launch a 401(k) target-date fund with a 5% to 20% allocation to private investments in the first half of 2026.
Additionally, the company stated that it anticipates “the portfolio of the future” to consist of 20% private markets, 30% public fixed income, and 50% public stocks.
In May, Empower, which looks after almost 19 million Americans’ retirement savings totaling about $1.8 trillion, declared that it would start providing access to alternative assets, including as private credit and private equity, through the retirement plans it handles.
In the meantime, efforts to permit private securities in defined-contribution plans such as 403(b)s and 401(k)s have received express support from the Trump administration. According to reports, President Donald Trump has given thought to signing an executive order that would increase retirement plans’ access to private-market investments.
The movement to incorporate private assets into retirement programs is met with skepticism from many lawmakers. Notably, earlier this month, Elizabeth Warren, the top-ranking Democrat on the Senate Banking Committee, expressed concerns about the possible risks to financial stability posed by nonbank financial institutions involved in private-credit activities and called for the Financial Stability Oversight Council to create and carry out a stress test of these institutions.
