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Just when it appeared as though all the good ideas for exchange traded funds were taken, a new filing from State Street Global Advisors (SSGA) and Apollo Global Management dispelled that notion.
Earlier this month, SSGA and the private equity giant filed plans for the SPDR SSGA Apollo IG Public and Private Credit ETF. A couple of quick housekeeping items. First, the filing with the Securities and Exchange Commission (SEC) for this ETF doesn’t include a ticker or expense ratio –signs that launch isn’t imminent.
Second, there are some private credit ETFs on the market. However, those funds typically access private credit via public debt instruments. The Apollo/SSGA ETF is looking to change that.
“The Fund intends to invest in private credit, which refers to a wide range of credit instruments, such as instruments that are directly originated, issued in private offerings, issued to private companies, and/or issued to borrowers by non-bank lenders (i.e., non-bank lending instruments), including asset-backed and corporate finance instruments sourced by Apollo (each, an “AOS Investment”),” according to the regulatory document. “The Fund can invest across numerous types of instruments, including but not limited to consumer finance, residential mortgage loans, commercial real estate, hard assets (through securitized loans), and financial assets.”
Private Credit ETF Could Be Appealing to Clients
It remains to be seen if the SEC will approve the SPDR SSGA Apollo IG Public and Private Credit ETF, but if that happens, the fund could be an interesting option for advisors’ toolboxes. One source of appeal with private credit is that it can spruce up the 40% of 60/40 portfolios.
“Private credit may help investors generate the income they need, while increasing portfolio diversification and helping to maintain an appropriate risk profile. These alternative assets are not traded on public exchanges, so they can carry an illiquidity premium to traditional investments. This also may result in lower correlation to traditional public assets,” according to CION Investments.
When it comes to private credit, the ETF structure can offer needed flexibility because like other corners of the fixed income universe, different private credit instruments have varying credit profiles and durations. Those are among the reasons why Apollo’s experience could enhance this appeal of this fund, assuming it’s allowed to come to market.
“Apollo has the capability to invest beyond corporate direct lending across the whole private credit spectrum. Apollo reported $671 billion in assets under management as of March 2024, the bulk of which was credit, and has 16 distinct platforms for originating debt,” observes Morningstar.
What Are the Risks?
Working on the premise that the SPDR SSGA Apollo IG Public and Private Credit ETF will be approved, it’s worth examining some of the risks associated with private credit – namely the potential for illiquidity and how private credit instruments are valued.
Due to illiquidity in the private credit market, it’s often third parties that value this form of debt. In the SEC filing, SSGA warns that holdings it believes to be liquid can eventually turn out to be illiquid. In the ETF wrapper, Apollo may be able to ameliorate that issue to some extent, but if it is acting as both buyer and seller of the ETF’s holdings, that could cause concern among regulators.
“Apollo is not listed as an advisor or subadvisor, and the filing does not disclose any reference to a financial arrangement between the fund and Apollo. This doesn’t preclude an agreement between the firms, but it does raise the question of how Apollo is being compensated for its services,” adds Morningstar.
Bottom line: the SSGA/Apollo private credit ETF could be a unique income-generating tool, but some questions need to be answered before it comes to market.