On this week’s episode of ETF Prime, host Nate Geraci was joined by Cinthia Murphy, VettaFi investment strategist, to discuss the surge in private credit ETF filings and expectations for investor demand. Afterward, ETF industry veteran Dave Nadig joined Geraci to discuss the state of ETF product development.

Private Credit ETFs in Demand

To begin, Geraci noted the recent news that Apollo Global Management is partnering with State Street in the launch of an ETF that includes private credit. Other fund providers are seeking to do the same. Geraci also highlighted a recent article from VettaFi’s Kirsten Chang on how ETFs are now trying to capture appeal from private equity markets. Turning to Murphy, Geraci asked her why she believes this private credit ETF trend is taking off all of a sudden.

She pointed to a few reasons why private credit is seeing time in the spotlight. First, she noted that private assets are “the ultimate alternative” in a market era where investors are looking to diversify their portfolios. Alternatively, Murphy floated the possibility that issuers may be looking at private credit ETFs as a means to activate a strong inflow of new fund flows, much like spot bitcoin ETFs did.

“There’s a lot of conversation about how much money is sitting in private companies, private businesses, the private asset world, versus public markets,” Murphy noted. “Maybe investors are asking, how do we tap into all of that?”

Advantages of Direct Exposure

Geraci agreed with Murphy’s points. He then noted investors and advisors would be interested in gaining exposure to a wide number of companies that have never went public. However, Geraci asked Murphy what she thought of the already-existing ETFs that give exposure to private equity firms. He did note these funds don’t hold direct exposure to private equity companies.

Murphy referred to funds like these as a “proxy” investment. They offer indirect exposure to an otherwise attractive asset. Some of these funds have done well. But Murphy shared that “none of them have caught on fire” in terms of inflows.

“Now that you have firms like BlackRock and State Street really committed to go directly to the private asset space, all of a sudden, it could reach something completely different, and folks get excited about that,” she added.

Tying back to her earlier spot bitcoin comparison, Murphy observed that direct exposure to a valuable asset can be far more attractive for fund flows than an indirect strategy.

Murphy also highlighted her enthusiasm for the growing strategies within the ETF space. Many advisors and investors thought spot bitcoin ETFs would be the only major innovation in the field this year. But the potential private credit and equity ETFs highlight there’s plenty of room for more evolution within ETFs.

Private Asset Roadblocks

Geraci agreed that excitement over these potential private credit products has exploded over the last few weeks. However, he asked Murphy if she could explain the challenges that owning private assets within an ETF wrapper can bring.

For Murphy, the main concern with private equity is liquidity, as investors often cannot trade in and out of these assets. This lack of liquidity stands in stark contrast to ETFs, which are often used due to their highly liquid structure.

“It’s really difficult to have that creation-redemption mechanism that makes the ETF structure the powerful vehicle that is functioning properly when you’re navigating securities that don’t trade at all,” Murphy added.

Expecting More Complex ETFs

To close out this week’s episode, Geraci welcomed ETF industry veteran Dave Nadig back to the podcast. After pointing out that over 450 ETFs have come to market this year, Geraci noted that for an upcoming presentation, Nadig is highlighting how the ETF industry isn’t launching as many basic funds anymore.

Instead, issuers are opting to offer more complex funds, such as the upcoming private asset ETFs. Geraci then asked Nadig if he thinks the uptick in complex ETF launches is a good thing from a product development perspective.

Nadig viewed this as good news, adding that the alternative could have led to an outpouring of straightforward and highly similar strategies that provide S&P 500 exposure. He added that he believes the ETF industry has changed, and “almost all of the interesting stuff” will be in some form of a packaged portfolio or package trade. Despite an uptick in interesting ETFs, Nadig observed that the bulk of the flows are still going toward the highly established core products.

“We’re heading more and more toward retail. The core portfolio blocks are all taken, and they’re taken generally below 15 basis points,” Nadig noted. “I do think that there’s room for long-term product.”