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

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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.

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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.

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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 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 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.

Apollo declined to comment on the sudden uptick in net inflows over the past month. State Street didn’t respond to a MarketWatch request for comment.

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 — 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.

A CLO is an actively managed securitized product backed by a highly diversified portfolio of loans. A private-credit CLO pools those private loans and issues different tranches of securities — ranging from AAA to B — to investors, with higher-rated, lower-yielding securities that are at lower risk of losses due to potential default of the underlying loans. As a result, investors in CLO ETFs aren’t buying the loans directly, but rather floating-rate debt securities that are constructed by a CLO manager and used to purchase the loans.

“The beauty of the CLOs is that they offer us liquidity, because at the end of the day, they’re like bonds, and they trade in the market,” said Tony Kelly of BondBloxx, who co-founded the first ETF company to focus solely on fixed-income products.

“Within a private-credit CLO, there are approximately 100 different loans in the underlying [portfolio], and that’s what gives the ETF the private-credit exposure, but the CLO layer gives us the liquidity that we need to be able to manage the fund,” he told MarketWatch in a phone interview.

The $134 million BondBloxx Private Credit CLO ETF PCMM has over 80% of its assets in CLOs that invest in middle-market loans, according to the company website. A similar product from Virtus Investments — the $19 million Virtus SEIX AAA Private Credit CLO PCLO — has over 90% of its assets in middle-market CLOs.

Over the past few years, the financial-services industry has seen a significant trend of converting illiquid assets such as private-credit loans into liquid, tradable securities like CLOs.

Private-credit CLOs are a relatively new but rapidly growing segment within the broader CLO market. While broadly syndicated loan, or BSL, CLOs still dominate the CLO market in terms of scale, middle-market CLOs are gaining traction due to the rise of private credit. At the end of 2024, private-credit CLOs made up roughly 15% of the broader $1.3 trillion CLO market, according to Moody’s.

However, some CLO portfolio managers and ETF developers argue that while securitizing private credit through CLOs does enhance tradability and makes it appear more liquid to investors, it doesn’t change the illiquid nature of the underlying assets.

Unlike BSL CLOs, which pool large, publicly rated and liquid loans originated by banks and sold to multiple lenders, private-credit CLOs are more of a “black box of loans” that have less transparency and less liquidity and are nearly impossible to rate, said William Sokol, director of product management at VanEck.

The firm’s $1 billion VanEck CLO ETF CLOI invests primarily in investment-grade-rated tranches.

“How we make the decision on whether to buy a CLO is by looking at the [CLO] manager, looking at the portfolio and understanding the deal, but you can’t really do that in a private-credit CLO, because you can’t really do that level of due diligence on the underlying private loans,” Sokol told MarketWatch in a phone interview.

“We cannot get the same level of comfort around the pricing of a CLO that’s backed by middle-market or private loans that barely ever trades, and that makes it a lot less appropriate for daily liquidity of an ETF,” said Fran Rodilosso, head of fixed-income ETF portfolio management at VanEck.

Tested vs. untested during periods of market stress

Of course, the biggest risk for a credit-market investor is a systematic credit event — like a major economic downturn — that could lead to a cascade of defaults and a freeze in liquidity across credit markets.

Signs of concern emerged in the CLO market in April after tariff-fueled volatility sent the U.S. financial market into a tailspin. Investors worried that corporate borrowers faced squeezed margins and refinancing headwinds if Trump’s aggressive tariffs were to trigger a recession in the U.S. economy, and they didn’t know whether these higher-yielding investment vehicles could weather the storm.

On April 7, the $20 billion Janus Henderson AAA CLO ETF JAAA, which primarily invests in the seniormost tranches of BSL CLOs, saw $585 million in net outflows, the biggest single-day withdrawal since the fund’s inception in October 2020. The exodus also pushed the fund to trade at a record 1.1% discount to its net asset value, according to Dow Jones Market Data.

VanEck’s CLOI also experienced over $50 million in net outflows on April 8, the largest one-day exodus since the fund’s inception in June 2022, according to FactSet data.

But in the view of VanEck’s Rodilosso, the significant amount of outflows actually suggests the BSL CLO market has proven liquid and resilient.

“We’ve seen our first period of stress in April, and there was some movement into discounts to net asset value, but these CLO ETFs saw decent size of redemption activities, so the market did function,” he told MarketWatch via phone.

“It’s only one test so far, but these [BSL CLO] ETFs have held up for the most part,” Rodilosso said.

However, private-credit CLO ETFs have not yet faced a real-world systemic test and thus carry greater structural uncertainty should such an event hit.

“That would be even a bigger concern for the ETFs that are putting private credit [into their portfolio holdings] either through the loans themselves or through tranches of private-credit CLOs,” said Jon Brager, portfolio manager at Palmer Square Capital Management. “How are you managing your overall liquidity, given that the underlying [portfolio] is certainly less liquid, if not illiquid, in particular in times of stress?”

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