Two ETFs claiming to be the first of their kind to target private credit launched this week, tapping into growing investor appetite for the sector.
Fixed-income ETF issuer BondBloxx launched a fund to invest in private credit collateralized loan obligations, while active ETF specialist Virtus issued a similar product.
BondBloxx’s ETF invests in CLOs tied to the middle market, a sector representing roughly 300,000 businesses generating $13 trillion in annual revenue. Virtus’s product, meanwhile, targets what Virtus describes as “the strongest and most undervalued AAA rated private credit CLOs.”
The launches arrive amid a surge in investor interest in fixed income — and bond ETFs. In November alone, bond ETFs attracted $28 billion, with $12 billion flowing into risk-on credit sectors and a record $5 billion into loan ETFs.
But these funds are different and untested, investing in illiquid private credit, and arriving as interest in the $30 trillion market is at an all-time high. Yet despite increased appetite, the sector has primarily been accessible only to large institutions and high-net-worth investors. Asset managers are eager to change that. In addition to BondBloxx and Virtus, State Street Global Advisors and Apollo Global Management recently filed for regulatory approval of an ETF that combines public and private credit.
Virtus’ William Smalley said that “ETFs will become essential tools for investors seeking to access the burgeoning private credit market as it evolves.”
But there are plenty of skeptics about the viability of the new concept. Morningstar analysts have noted that private market ETFs face challenges, particularly in valuing assets inside an exchange-listed product that are now priced quarterly and don’t trade. As Morningstar told II in September, “... the issue, at least historically with private markets is that they’re priced very infrequently, typically quarterly, and they are very illiquid, very hard to trade, maybe even impossible to trade.”
Questions have also been raised about structures relying on single counterparties to provide pricing and liquidity — such as Apollo’s proposed role in the State Street fund — and the potential for conflicts of interest and operational risks.
BondBloxx’s design seeks to address some of these issues by offering exposure to loans underwritten by multiple market participants. The fund allows investors to access a diversified slice of U.S. middle-market opportunities, combining private credit’s potential for enhanced returns with the cost-efficiency and tradability of an ETF. “This fund offers a unique way to gain access to private credit with liquidity and transparency,” said BondBloxx co-founder Tony Kelly.
