As demand for yield climbs and fixed income regains its footing, investors are increasingly turning to private credit.
Once the domain of institutions and hedge funds, this trillion-dollar asset class is rapidly becoming more accessible through exchange-traded funds (ETFs).
But as private credit enters the ETF mainstream, some industry insiders are raising a cautionary flag: just because it can be wrapped in an ETF does not mean it should be.
ETFs are built on the premise of daily liquidity. Private credit, by design, is not.
The fundamental tension between the structure of ETFs and the underlying assets of private credit — including non-traded loans, bespoke lending agreements, and assets that do not price daily — has created an inflection point for issuers and investors alike.
It is a story playing out across new filings, growing assets under management, and emerging concerns among capital markets professionals.
“There’s a difference between structural innovation and liquidity illusion. Investors need to understand what’s under the hood, especially if redemptions start flowing.”
The Allure of Yield and Access
The push into private credit ETFs is driven by two undeniable market forces: uncertain interest rates and democratized access.
In a world of higher-for-longer monetary policy, private credit offers the potential for attractive risk-adjusted returns compared to traditional core fixed income.
These ETFs allow investors, particularly financial advisors and retail platforms, to tap into floating-rate yield potential without the operational friction of limited partnerships or lock-up periods.
Recent launches from major players like State Street and PGIM have drawn significant early interest.
In some cases, fund flows and media coverage have outpaced what is typically seen in niche corners of the bond market.
But that enthusiasm does not come without challenges.
Redemption Risk in an Illiquid Market
Unlike traditional bond ETFs, which hold regularly traded securities, and can typically sell positions during large redemptions without disrupting pricing, private credit ETFs are far less nimble.
“What happens if 75% of the fund is redeemed in a single week?” asked one capital markets strategist. “These aren’t Treasuries. These are private deals. Someone has to be willing to take the other side, and often, they are not.”
While some ETFs use interval or tender-offer structures to slow the pace of redemptions, others operate with full daily liquidity.
This raises concerns about how portfolio managers would meet withdrawal demands without resorting to fire-sale pricing or experiencing NAV distortion.
Some large providers have built backstop agreements with affiliated institutions to offer liquidity support during stress.
However, questions remain about whether those partners would step in during real dislocations, and at what price.
The ETF Wrapper: Flexible, But Not Foolproof
The ETF wrapper has proven remarkably adaptable over the past two decades, accommodating commodities, active strategies, and more.
Still, wrapping private, illiquid loans into a vehicle designed for daily trading introduces a risk that could break under pressure.
This does not mean the private credit ETF boom is inherently flawed.
It does mean that both issuers and investors need to recognize the boundaries of where the structure works best, and where it may not.
A Market Still Finding Its Footing
For now, interest in private credit ETFs continues to build, supported by headlines and growing appetite for income.
The challenge for asset managers and ETF platforms is not just building new products. It is also about educating investors on when ETFs are the right tool, and when other structures may be more appropriate.
The opportunity is real. So is the risk. Success will favor those who are clear about both.
