MW Private-credit ETFs are here. Why your retirement account may be their next target.

By Isabel Wang

Black boxes in the ETF space? The rise of private-credit funds - and what's really inside.

Private-credit exchange-traded funds aren't in 401(k)s yet - but they are Wall Street's latest effort to bring private assets to the masses and, eventually, into retirement plans.

At least three ETF developers - StateStreet, BondBloxx and Virtus - have launched funds designed to tap into private credit, either directly or through collateralized loan obligations.

These funds mark the latest effort to bring a popular Wall Street product within reach of retail investors, allowing them to easily buy and sell in the $1.6 trillion private market for loans made by nonbank lenders to medium-sized companies, in return for yields of up to around 10% - much higher than publicly traded debt instruments like bonds or Treasurys.

Sound enticing? There's a catch: How will inherently hard-to-value assets that can't easily be sold perform in a fund wrapper that trades continuously on a public exchange? In other words, are less-liquid assets appropriate for an ETF wrapper?

The rise of these private-credit products is raising alarms among market observers, as many see the lines between liquid and illiquid, public and private, transparent and opaque becoming increasingly blurred. What was once an asset class reserved for sophisticated institutions is now being sliced, repackaged and sold as an easy income solution for yield chasers through ETFs or mutual funds - a shift that could make them risky and potentially harmful for everyday investors.

What is private credit, anyway?

Private credit refers to privately negotiated loans between borrowers - typically small to midsize private companies - and nonbank financial institutions.

Unlike public debts such as corporate bonds, which can usually be priced on a daily basis even if they are not traded on exchanges, private-credit loans are often less liquid and are rarely traded on the secondary market. This makes them harder to value on a daily basis and more difficult for investors to exit quickly - especially in times of market stress.

Investors should be very careful about the asset/liability mismatch in private-credit ETFs, said Paul Olmsted, senior analyst of fixed-income strategies at Morningstar. "An investment that technically should be longer-term, less liquid, is perhaps not appropriate in a daily liquid vehicle," he told MarketWatch via phone.

As a result, these ETFs "are not attracting as many retail investors as you might think," he added, since they cannot seamlessly trade in and out of the fund.

The potential liquidity mismatch also raises questions about how such assets fit within existing regulatory frameworks.

Since 2016, the Securities and Exchange Commission has barred U.S.-based open-end funds, including ETFs, from having more than 15% of their assets in illiquid holdings. This is known as the liquidity rule, and it aims to manage liquidity risk and ensure that funds can meet redemption obligations so that investors can easily enter or exit positions without significantly affecting the price of the funds.

ETF issuers are searching for ways to navigate that rule and are rolling out products that push up against the boundaries of what's permissible.

State Street's private-credit ETF

For the groundbreaking SPDR SSGA IG Public & Private Credit ETF PRIV, State Street (STT) - one of the world's largest ETF managers - said its private-credit exposure is expected to be between 10% and 35% of the portfolio, but it has attempted to solve this liquidity problem by partnering with Apollo Global Management $(APO)$, one of the largest private-credit managers in the world.

Under this arrangement, Apollo has agreed to provide bids, or to buy back the fund's private-credit holdings if State Street asks it to, of up to 25% a day and 50% a week. As a result, its private-credit holdings could be classified as liquid and thus exempt from the 15% illiquid-asset limit.

As of July 31, most of PRIV's holdings are in Treasurys, agency mortgages and public corporate debt. Only around 22% of the fund is in "Apollo-sourced investments," according to the fund's website.

Aniket Ullal, head of ETF research and analytics at CFRA Research, said it's worth noting - if applying a "narrower" definition of private credit that focuses on direct lending and illiquid private placements - that not everything Apollo sources, but rather only about 7% of the fund, is in "true private credit." Ullal cited fixed-income research and data firm Solve.

But in the view of Anna Paglia, executive vice president and chief business officer at State Street Investment Management, PRIV is "not designed" to be a private asset ETF, but providing additional yields to investors by "having a segment of the portfolio invested in private loans."

Unlike the initial frenzy leading up to its debut in late February, the hotly anticipated PRIV failed to gain traction until very recently. After a slow start, the fund has attracted around $90 million of net inflows since June and now oversees $145 million, according to FactSet data.

"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 in a phone interview 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 said.

Apollo declined to comment on the sudden uptick in net inflows over the past month.

The expense ratio for PRIV is 70 basis points, compared with 9 basis points for the firm's largest and most heavily traded fund - the SPDR S&P 500 ETF Trust SPY, according to FactSet data.

State Street is also planning a second ETF that provides exposure to private debt that may also be sourced by Apollo, the SPDR SSGA Short Duration IG Public & Private Credit ETF, according to an SEC filing in May.

But while regulators work to draw clearer lines around what qualifies as illiquid, industry leaders argue that the traditional divide between public and private debt is becoming increasingly blurred.

Marc Rowan, CEO of Apollo Global Management, said in a CNBC interview late last year that he predicts investors will not be able to tell the difference between public and private credit a year from now, as some public corporate bonds are already illiquid, often taking up to five days to sell during periods of stress.

"It won't be different issuers, it won't be different ratings, it won't be different sizes, and it won't even be different liquidity. Everything that exists in the public markets on the fixed-income side - repo, borrowing, easy leverage, ratings, daily pricing - is all coming to the private market," Rowan said. "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?"

Rowan also said the notion of a "liquidity discount" in private credit is going to "disappear," because "there's not going to be appreciable differences in liquidity" between private and public assets. As a result, the traditional market beliefs that private assets somehow equal risk or that "private" infers a size of a company are becoming outdated and will be seen very differently than in the past, he said.

Trump backs industry push for 401(k) private-credit access

The launch of private-credit ETFs this year also comes as regulators revisit how much exposure to private markets retirement savers should be allowed to take. The Office of the Investor Advocate at the SEC announced on June 25 that it would prioritize "Private Market Investments in Retirement Accounts" as an objective for 2026.

Meanwhile, the push to add private securities to 401(k) menus has also become a shared priority for some of Wall Street's largest asset managers and for the Trump administration. BlackRock $(BLK.AU)$ - the world's largest asset manager - is preparing to offer a 401(k) target-date fund with a 5% to 20% allocation to private investments in the first half of 2026, the company said in a press release last month.

The firm also said it believes "the portfolio of the future" will be made up of 50% public equities, 30% public fixed income and 20% private markets.

Empower, which manages around $1.8 trillion in retirement accounts for nearly 19 million Americans, announced in May that it would begin offering access to alternative investments - including private equity and private credit - through the retirement plans it oversees.

Meanwhile, the Trump administration has been explicitly supporting the effort to allow private securities in defined-contribution plans like 401(k)s and 403(b)s. President Donald Trump has reportedly considered an executive order designed to make private-market investments more accessible to retirement plans.

Some lawmakers are skeptical of the push to include private assets in retirement plans. Most notably, Elizabeth Warren, the top-ranking Democrat on the Senate Banking Committee, earlier this month called for the Financial Stability Oversight Council to design and conduct a stress test of nonbank financial institutions engaged in private-credit activities, expressing concerns about their potential risks to financial stability.

See: Inside the great ETF boom of 2025: 'How do you navigate all this?'

How CLOs offer a back door for private-credit exposure in ETFs

While it's still unclear in what form private assets will ultimately enter retirement accounts, there are multiple pathways being tested. For example, ETFs don't have to go straight into private credit but can go through private-credit collateralized loan obligations, also known as private-credit CLOs.

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August 05, 2025 11:28 ET (15:28 GMT)

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