By Layla Zulfa 
Fears of a burgeoning crisis in the private credit market are intensifying, sending ripple effects through the Exchange Traded Fund (ETF) industry, which has recently begun to embrace this less transparent and typically illiquid asset class. The confluence of rising interest rates, economic uncertainties, and mounting investor redemption requests is subjecting the private credit sector to an unprecedented stress test, challenging the innovative structures designed to bring these loans into publicly traded vehicles.
The Ascendance of Private Credit: A Decade of Growth
Private credit, essentially direct lending by non-bank financial institutions to companies, has exploded in popularity over the past decade, evolving into a colossal segment of the global financial market. Following the 2008 global financial crisis, stricter regulations on traditional banks, such as Basel III, curtailed their capacity and appetite for corporate lending, particularly to mid-sized and leveraged companies. This regulatory vacuum created a fertile ground for private credit funds to step in, offering bespoke financing solutions that banks could no longer provide.
Investors, perpetually searching for yield in an era of historically low interest rates, flocked to private credit’s promise of higher returns, often accompanied by floating rate structures that offered protection against inflation. The market’s allure also stemmed from its perceived diversification benefits and lower correlation with public markets. Major players like Apollo Global, Ares Capital, KKR, and Blue Owl Capital spearheaded this growth, deploying vast sums into direct loans, mezzanine debt, and distressed credit. By 2024, the global private credit market was estimated to be well over $1.5 trillion, with projections suggesting it could exceed $2 trillion within the next few years. This rapid expansion, however, came with inherent characteristics: loans that are often less liquid, less transparent, and carry higher risk profiles than traditional syndicated bank loans or corporate bonds.
ETFs Enter the Fray: Bridging the Liquidity Gap
The emergence of private credit-focused ETFs represents a significant development in financial markets, aiming to democratize access to an asset class traditionally reserved for institutional investors and high-net-worth individuals. ETFs, celebrated for their daily tradability, transparency, and lower cost structures, faced a fundamental challenge in integrating private credit’s inherent illiquidity. The Securities and Exchange Commission (SEC), in its role as a market regulator, spent considerable time evaluating proposals before granting approval.
A pivotal moment arrived just over a year ago, in February 2025, when the SEC approved the first ETF explicitly branded as a private credit fund. This landmark decision paved the way for products like the State Street IG Public & Private Credit ETF (PRIV), developed in collaboration with alternative investments manager Apollo Global. The regulatory framework established for these novel ETFs stipulated specific limitations on direct exposure to private credit issues. Currently, ETFs directly investing in private credit are capped at holding no more than 35% of their assets in these less liquid instruments. This ceiling is a critical safeguard, designed to ensure that the ETFs can maintain their daily liquidity promise to investors while still offering exposure to the private credit universe.
Beyond these newer, direct private credit ETFs, a variety of older ETF products have long offered indirect exposure to the private credit sector. These funds typically invest in publicly traded Business Development Companies (BDCs) and Closed-End Funds (CEFs), which in turn, primarily allocate their capital to private loans. While this indirect approach inherently adds a layer of liquidity compared to holding private loans directly, it does not fully insulate investors from concerns about the underlying private credit market, especially during periods of elevated stress.
Market Strain and Performance Implications
The current environment of elevated interest rates, persistent inflation, and a looming threat of economic slowdown has begun to expose vulnerabilities within the private credit landscape. Reports of rising defaults and a general tightening of credit conditions have prompted some investors in traditional private credit funds to seek redemptions, putting pressure on fund managers to meet these demands in a market where assets are not easily liquidated.
This stress is palpable within the ETF space, particularly among funds with significant, albeit indirect, exposure to private credit. The VanEck BDC Income ETF (BIZD), a long-standing fund launched in 2013 with approximately $1.5 billion in assets, exemplifies this vulnerability. BIZD has seen a notable decline, down 13% since the start of the current year (2026). The reason for its underperformance is clear: BIZD’s top holdings include publicly traded shares of prominent private credit managers and BDCs, such as Blue Owl Capital and Ares Capital. Blue Owl Capital, a significant player in the direct lending space, has seen its shares plummet over 46% this year, reflecting widespread investor apprehension regarding the health and prospects of the private credit industry.
Similarly, the Simplify VettaFi Private Credit Strategy ETF (PCR), another fund that allocates its investments predominantly to BDCs and CEFs, has experienced a challenging period, declining around 20% over the past year. These performance metrics underscore how market anxieties about private credit quality and liquidity are translating into tangible losses for ETFs that provide access to the sector, even if indirectly.
A crucial metric reflecting investor sentiment and liquidity concerns in ETFs is the discount to Net Asset Value (NAV). Unlike open-end mutual funds, ETFs can trade at a premium or discount to their underlying assets throughout the trading day. For BIZD, this has been a recurring issue, closing at a discount to its NAV 37 times in calendar year 2025, and already 12 times in the current year. This indicates that investors are willing to sell their shares for less than the theoretical value of the fund’s underlying holdings, highlighting a desire for immediate liquidity even at a cost.
Contrasting Liquidity Mechanisms: Gating vs. Continuous Trading
At the heart of the current private credit debate is the fundamental issue of liquidity. Private credit, by its very nature, is not designed for daily trading. Loans are often held to maturity, and the process of valuing and selling them can be lengthy and complex, especially in a stressed market. This inherent illiquidity creates a tension with the daily tradability demanded by ETF investors.
Traditional private credit funds often employ "gating" mechanisms, which allow them to restrict investor withdrawals during periods of market stress or illiquidity. As Todd Rosenbluth, head of research at VettaFi, explained on CNBC’s "ETF Edge," these measures are put in place "because you said we can’t have a run on the bank." Such restrictions are intended to prevent forced selling of illiquid assets at fire-sale prices, thereby protecting the remaining investors and the fund’s long-term stability. While this approach can mitigate disorderly market outcomes, it comes at the cost of locking up investor capital, a significant concern for those needing immediate access to their funds.
In contrast, ETFs offer continuous trading throughout the day, providing investors with the option to sell their shares at any time. However, this liquidity may come at a price. "You can get out, you’re just going to pay or you’re going to sell at a discount to net asset value," Rosenbluth noted. This dynamic highlights the market’s efficiency in pricing risk and illiquidity. When demand to sell an ETF holding illiquid assets outweighs buying interest, the ETF’s market price can decouple from its NAV, trading at a discount. This mechanism allows for price discovery and liquidity provision in real-time, even for underlying assets that are inherently illiquid, without imposing direct redemption restrictions on investors.
The State Street/Apollo Model: A Controlled Approach
The State Street/Apollo collaboration exemplifies a structured approach to integrating private credit into the ETF wrapper, emphasizing risk management and liquidity. The State Street IG Public & Private Credit ETF (PRIV), approved by the SEC in February 2025, and its shorter-duration counterpart, the State Street Short Duration IG Public & Private Credit ETF (PRSD), represent the vanguard of these new products.
These funds are designed with a specific objective: to outperform standard bond benchmarks by strategically including investment-grade private credit alongside highly liquid public securities. According to their prospectuses, both PRIV and PRSD can hold up to 35% of their assets in private credit issues, but they also have the flexibility to hold less than 10% at times, depending on market conditions and portfolio management decisions.
A closer look at their current holdings reveals a cautious strategy. For instance, only one of PRIV’s top ten holdings is currently private credit, with the portfolio predominantly featuring highly liquid assets such as U.S. Treasury securities and mortgage-backed securities (MBS). Similarly, PRSD’s top holdings are a mix of government bonds, mortgage-backed securities, and currency instruments. This strategic allocation of a significant portion of their portfolios to liquid assets is crucial for managing the daily redemption needs of an ETF while still providing exposure to the private credit yield premium.
PRIV, with $831 million in assets under management (AUM), and the smaller PRSD, with $48 million in AUM, have shown relatively flat performance since the beginning of the year. This contrasts sharply with the declines seen in BDC-focused ETFs and the broader private credit market, suggesting that their diversified, investment-grade focused approach, coupled with a substantial allocation to liquid public debt, is providing a degree of stability amidst market turbulence. Both funds hold slightly over 20% of their assets in Apollo-sourced investments, leveraging the alternative asset manager’s expertise in originating and managing private credit portfolios. This model aims to offer the best of both worlds: access to the higher yields of private credit with the liquidity and transparency of an ETF, albeit within carefully defined risk parameters.
Broader Implications for Fixed Income Markets
The integration of private credit into ETFs is not merely a product innovation; it represents a fundamental shift in the architecture of fixed income markets. Jeffrey Rosenberg, systematic fixed income senior portfolio manager at BlackRock, highlighted this transformation on "ETF Edge," stating that ETFs have "just completely changed how liquidity provisioning, price discovery… how the ecosystem of credit market-making functions in a modern credit market." By offering an accessible and tradable wrapper for active portfolio managers, ETFs enable more precise targeting of specific segments of the credit market, including those traditionally opaque like private credit.
The recent market volatility has also underscored a broader trend among ETF investors: a discernible "risk off" sentiment. VettaFi’s Rosenbluth observed investors "taking some risk off" by shifting capital from longer-duration bond funds, which are more sensitive to interest rate fluctuations, into shorter-duration funds, which offer greater capital preservation in a rising rate environment. This movement reflects investors’ prudent response to market uncertainty, seeking safety and flexibility.
Regarding systemic risk, particularly the "asset-liability mismatch" or "run on the bank" scenario, BlackRock’s Rosenberg offers a nuanced perspective. While this remains the primary concern for private credit markets, he believes the risk is somewhat mitigated today because many private credit vehicles are intentionally designed with limited liquidity provisions. This structural feature, while restricting investor access, can prevent sudden, disorderly collapses. Instead, the impact of stress might manifest more gradually, potentially over longer time horizons, as companies face refinancing at significantly higher rates. This slower burn allows the system to absorb shocks differently, preventing immediate cascades but potentially prolonging periods of financial strain for borrowers.
Ultimately, both traditional private credit funds and their ETF counterparts, despite their differing liquidity mechanisms, share a common goal: to prevent disorderly market outcomes during stress. Private credit funds achieve this through redemption restrictions, while ETFs facilitate continuous trading with real-time price adjustments. Both approaches, according to experts, contribute to a system that reflects developing stress without succumbing to immediate, widespread instability. The ongoing evolution of these structures will continue to shape how capital is allocated and risks are managed in the dynamic landscape of modern finance.