Exchange traded funds (ETFs) have long been game-changers for investors with regard to their ability to easily package unique and esoteric asset classes. Thanks to the rise of ETFs, investors of all sizes can add real estate, commodities, options, and international stocks to their portfolios just as easily as they can buy the S&P 500. And now ETFs could be doing the once previously unthinkable.
Soon investors will be able to add private assets to their portfolios.
Thanks to a new filing from one of the ETF world’s giants and another’s recent buyout of a top private asset data provider, private equity and credit ETFs could be coming to a brokerage platform near you. These groundbreaking funds could finally unlock one of the last remaining asset classes to regular Joes.
Private Equity & Credit
All in all, there are about 7,400 publicly traded companies of all sizes on U.S. exchanges. These firms make up what we call the stock market. However, there are thousands of private businesses that don’t have company stock trading across the NYSE, NASDAQ, and other exchanges. According to Pitchbook, the private market will be worth around $28 trillion in just a few years.
The same could be said for the number of bonds and other debts existing in the U.S. The vast bulk of IOUs are private loans and bonds issued by banks and other lenders that are actively traded as easily as bonds from the U.S. government or Coca-Cola. There are currently more than $1.6 trillion in private credit loans issued worldwide.
This is the stomping ground of alternative asset managers and private equity/credit players.
Private equity strategies generally involve investing in companies that are not publicly traded on stock exchanges, while private credit is a pool of loans—which may include small business loans, venture debt, consumer loans, accounts receivable loans, law financing, fleet financing, etc.—made by non-bank lenders.
Both areas of the market have long been unapproachable from regular retail investors and non-accredited investors.
The shame is that both private equity and private credit asset classes have been shown to provide stable and steady returns, offering non-correlated sources of alpha to portfolios. Institutional investors have long been able to tap the private world to generate steady returns in both good and bad economic environments.
The Unthinkable
For retail investors wanting to tap private equity/credit for their portfolios, they have been forced to keep dreaming. But those dreams may be coming true, if State Street, Invesco, and BlackRock have anything to do with it. The race to democratize private assets is on.
The first salvo could have been BlackRock’s recent purchase of Preqin. For $3.2 billion, BlackRock gained control of the premier alternative data and analytics provider. This follows its $12.5 billion purchase of Global Infrastructure Partners, which owns/manages private infrastructure assets. At the time of the Preqin deal, BlackRock chief, Larry Fink, said they could “index the private markets” and package private equity/credit into liquid ETFs that anyone could own.
State Street has taken this one step further by filing for an actual ETF filled with private credit assets. Partnering with alternatives asset giant Apollo, the third largest ETF provider has filed for the SPDR SSGA Apollo IG Public & Private Credit ETF. The ETF would own both public debt as well as private credit/loans issued by Apollo through its various subsidiaries. In the filing, Apollo has agreed to quote and provide so-called ‘firm bids’ on all the debt it has issued for the fund. 1
Following State Street’s filing, credit-oriented ETF issuer, BondBloxx, filed for a similar private credit CLO ETF. Capital Group, KKR, Partners Group, and Invesco have all expressed interest in replicating these models and bringing private assets to the public space via ETFs
Not There Yet
On the surface, investors should be cheering these types of proposals. Private assets—both equity and credit—provide plenty of non-correlated returns to a portfolio and can reduce volatility. Having one ticker access is great for portfolios and potentially could come with lower costs. This is a win-win for investors of all sizes.
But there are some asterisks with the filing and questions that need to be answered. A big one is the SEC and its approval chances. The agency limits open-end funds—which includes ETFs—and illiquid holdings to 15% of assets. An illiquid investment is defined as “an investment that the fund reasonably expects cannot be sold in current market conditions in seven calendar days without significantly changing the market value of the investment.” That definition could prove to be a headache with State Street’s/Apollo’s filing and many of these future proposals. Getting enough private credit/equity into a fund in the first place is another challenge.
Second, if the model works and an issuer can provide ‘firm bids’ and liquidity to illiquid assets, there’s the risk that private assets will lose their charm. After all, the appeal is that investors are required to hold these things for perhaps even decades. That is what creates their low volatility and generates returns over full market cycles. Adding liquidity could dent the appeal and change the asset class as we know it.
There’s some proof of this. A long time ago, international stocks had low correlations with U.S. equities and provided low volatility. Now, thanks to the ease of trading, the asset class functions differently. Could the same happen to private assets?
Alternative ETFs
These funds are selected based on their ability to tap into liquid alternative strategies and their assets under management. They are sorted by their YTD total return, which ranges from -7.5% to 16%. Their expense ratio ranges from 0.50% to 1.41%, while they have AUM between $159M and $950M. They currently yield between 1.2% and 7.91%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| FTLS | First Trust Long/Short Equity ETF | $730M | 15.8% | 1.54% | 1.41% | ETF | Yes |
| WTMF | WisdomTree Managed Futures Strategy Fund | $159M | 10.8% | 4.41% | 0.65% | ETF | Yes |
| QAI | IQ Hedge Multi-Strategy Tracker ETF | $612M | 8.1% | 1.85% | 1% | ETF | No |
| FMF | First Trust Managed Futures Strategy Fund | $164M | 1.6% | 2.52% | 0.95% | ETF | Yes |
| RLY | SPDR SSgA Multi-Asset Real Return ETF | $517M | -0.7% | 5.54% | 0.50% | ETF | No |
| MNA | IQ Merger Arbitrage ETF | $467M | -1.4% | 0% | 0.77% | ETF | No |
| DBMF | iMGP DBi Managed Futures Strategy ETF | $949M | -7.5% | 7.91% | 0.85% | ETF | Yes |
Either way, the cat is out of the proverbial bag. With State Street’s direct filing, BlackRock’s recent purchases, and other asset managers now talking about a big private assets game, private credit and equity could be coming to an ETF near you. There are a lot more questions and concerns that are now arising from these filings and plans.
Ultimately, these funds could provide a serious boost of non-correlated returns to a portfolio and underscore how ETFs have continued to change the game for retail investors.
The Bottom Line
The allure of private equity and credit is very appealing. Offering non-correlated and steady returns, retail investors have long been forced to watch from the outside. But this might not be the case anymore. With several new moves and filings, private assets could be coming to an ETF near you. That’s great news for investors.
1 SEC (September 2024). State Street’s SEC Filing