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Previously reserved for institutional investors and the ultra-wealth, the $30 trillion private credit market is now accessible to a broad swath of market participants, including advisors, thanks to the debuts of two exchange traded funds.
Earlier this week, the BondBloxx Private Credit CLO ETF (PCMM) and the Virtus Seix AAA Private Credit CLO ETF (PCLO) came to market, perhaps ushering in a new era of fixed income investing in the process. That said, collateralized loan obligations (CLOs) themselves aren’t new to the world of ETFs as several ETFs have found success with this asset class.
PCLO and PCMM differ by primarily focusing on corporate-issued CLOs, many of which are illiquid and can be tough to access for anyone but professional investors. Despite the illiquidity issue, private credit offers clients some advantages.
“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.
Assessing the New Private Credit ETFs
PCLO and PCMM have some similarities, including both being actively managed. For example, PCMM, the BondBloxx offering, directly accesses private credit middle market companies.
“There are approximately 300,000 middle market companies in the U.S., generating $13 trillion in annual revenue. These businesses are a central driver of U.S. economic growth, representing one-third of U.S. private sector GDP,” according to the issuer.
PCMM also has “the ability to own private credit CLOs from any of the major underwriters,” which could serve to bolster the new ETF’s diversity and liquidity. Like its rival, PCLO focuses on corporate CLOs with an emphasis on diversification and liquidity.
“The underlying loans for CLOs are senior and secured,” according to Virtus. “They are secured by corporate loans that have payment priority over both unsecured debt and equities in the case of bankruptcy. They are also well-diversified, with exposures to different industries and varying degrees of risk and return, time to maturity, credit ratings, and underlying fundamentals.”
Among the reasons that both new ETFs are relevant is the fact that even 15 years after the end of the global financial crisis, many smaller and mid-sized corporate borrowers have to tap alternative credit sources. That’s contributed to the boom in the private credit market.
Likewise, private credit typically offers higher yields than what investors are accustomed to in the traditional junk bond market while providing low correlations to publicly traded securities.
New ETFs Interesting, But Not Perfect
Many investors are apprehensive about new ETFs based on superficial metrics and old ETF lore about “seasoning.” In the cases of PCLO and PCMM age isn’t the issue as there’s arguably a case for their underlying investment objectives right now.
And while there’s never been a default on an AAA-rated CLO tranche, there are other risks for advisors to consider. Due to illiquidity in the private credit market, it’s often third parties that value this form of debt. That is to say an asset that’s liquid today may not be so in a week or a month. PCMM’s move to source CLOs from multiple underwriters could improve that ETF’s liquidity picture as could the Virtus relationship with Seix, which has deep experience in managing liquidity with CLOs and other illiquid assets. Time will tell.