Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton.
A new frontier in exchange-traded investing is beckoning everyday investors to cross over. Private investments are making their way into publicly traded ETFs. Who’s leading the charge, and what should you know before investing in a private equity or private credit ETF? Bryan Armour is the director of ETF and passive strategies research for North America and Morningstar Research Services. It’s good to see you, Bryan.
Bryan Armour: Good to see you.
Hear From Experts on Private Asset ETFs at the 2025 Morningstar Investment Conference
Hampton: You are moderating a panel at the Morningstar Investment Conference about private assets and ETFs. Give us some details.
Armour: I am fortunate to be joined by two incredible experts who have lived the different cycles of new ETFs, new assets going into ETFs, for decades. And so that’s Dave Nadig, who’s previously been at Betify, ETF.com, and even going so far back as Barclays Global Investors, which was purchased by BlackRock in 2007 or ’08 and became iShares. He has vast experience. He’s been a thought leader around ETFs for decades. Then Tony Kelly, who’s the current CFO and head of capital markets and product development at BondBloxx. Previously, he was head of product in the ETF business at Goldman Sachs, also was with BGI once upon a time before it moved into BlackRock, and was at BlackRock as well. So, these are people that, no one better to talk about the current challenges in the ETF market and putting private assets in ETFs.
Hampton: It seems like an all-star panel has been assembled here.
Armour: Yes, absolutely.
How Do Private Equity and Private Credit Investments Work?
Hampton: The terms private equity and private credit are circulating more among everyday investors. Can you explain what these investments are, and how do they work?
Armour: They’re umbrella terms. I think that’s one of the first challenges is just helping investors understand that there are a lot of different types of products, investments inside each of those wrappers. If you think in private equity, some people probably envision it like buying Apple when it’s still in Steve Jobs’ garage. But in reality, it could also mean buying SpaceX, which would be a large-cap public company. It’s worth something like half a trillion dollars at current valuation. There’s a wide range of products within each. I am looking to Dave and Tony to help me sort of demystify what that actually means on the credit side. There’s plenty to go into as well.
Why Access to Private Markets Is Expanding
Hampton: Why do you think there’s a push now to expand access to private markets?
Armour: Part of it is just the way that the market has changed. We’re seeing fewer small-cap companies; private companies are staying private longer. We’ve also seen since 2007, there were tighter restrictions for banks and some of the lending practices that they had. Over time with Dodd-Frank in 2010, we’ve seen these private credit issuers, the teams that were going out like Apollo or KKR, they’re going out originating some of this private credit, taking over some of that, part of the financial system and giving loans to businesses, to small businesses, to direct lending as well. It’s just taken on a different shape. It’s become a huge part of the market. And so I think investors, advisors, asset managers are trying to enable greater access.
How Private Assets Pose a Challenge in ETFs
Hampton: ETFs are known for transparency, tax efficiency, and low fees, yet it seems that private assets have the opposite reputation. Would that create a challenge when combining them? What do you think?
Armour: Yes, I definitely think it will. It’s something that’s new. It hadn’t really been tried at scale. We’ve seen a few stabs at it so far. One being State Street, their public/private investment-grade bond ETF, PRIV, which sort of mixes public and private, uses a pretty complicated method of adding liquidity to the private credit sleeve with their partner, Apollo. Then we’ve seen another approach from ERShares and their ETF, XOVR, where they basically just decided one day to switch into holding private companies, and made no disclosures really about it, and just did it.
There have been varied approaches, but some of the big issues are going to be, how do you price them every day? Once again, totally different approaches. State Street tries to create a different price, update NAV every day. XOVR has not changed its mark on SpaceX since December. It’s still sort of like the wild west. There are still challenges being figured out.
Private Asset ETF Performance: PRIV and XOVR
Hampton: And you mentioned two of these ETFs that already have private investments inside of them. Are there others? And what’s been their performance so far?
Armour: There are a couple of others, but those are the two biggest up to this point. We’ve seen a lot more interest in interval funds, other semiliquid offerings, but in the ETF space, PRIV, because it’s investment-grade, they’re accessing the most liquid private credit bonds on the market. They’re also doing a lot to price it daily to update things. It ends up looking a lot like their category, the intermediate core-plus category average. Looking at that category index, Bloomberg Universal, it’s just sort of holding investment-grade with maybe like an extra dose of credit risk. But for XOVR, it’s lagged a little bit since switching to include private companies, but that could just be because it hasn’t changed its mark on SpaceX, and that’s its largest holding.
What Does Morningstar Think of Private Asset ETFs?
Hampton: What do Morningstar analysts think of these investments right now?
Armour: It’s clear that at this point, transparency is an issue and something that every investor needs to be aware of and do their own due diligence. Part of the issue is they can’t really fully do their own due diligence because State Street won’t tell us or tell the market what the private credit deals are that are in the portfolio, like which ones are labeled as, “Oh, this is private credit.” That’s not available. Or what the underlying companies are, what the structure was around that private credit offering.
With XOVR, we don’t know exactly how they’re accessing SpaceX. We know it’s an SPV [special-purpose vehicle], but that’s the extent of it. We don’t know what costs go into buying the SPV, if there are ongoing costs. There was an article a couple of weeks ago about how if you want access to SpaceX, there’s a management fee that some of the people that are offering up their shares are requiring, as well as a significant fee upfront. There are all sorts of issues to get into, but for the most part, we’re taking a cautious approach. And I think, at this point especially, each ETF has to be judged on its own merit.
How Firms Are Pricing Private Portfolio Shares
Hampton: The SEC caps illiquid investments and ETFs at 15%, so stocks and bonds typically make up the rest. Public trading determines the pricing on that share, right? How are firms pricing the portfolio shares that are private?
Armour: So, it really depends. State Street, first of all, they set up a liquidity arrangement with Apollo where there is some sort of backstop. They can sell out some of their portfolio to Apollo a couple of times a day. I would say there’s a minimum amount that Apollo would have to buy, contractually needs to buy. So, they don’t see it as an illiquid holding. They are using that interpretation to go beyond 15%. XOVR is staying under 15% so far with their private equity holdings. And they’ve obviously taken a different approach where they haven’t changed marks on SpaceX at all since December, which obviously makes things more challenging for investors to see if they want to be invested in SpaceX and the price, they think the value is going up, but it’s not showing up in their ETF. It makes it hard, but State Street has been able to come up with a pretty complex but deep process for valuing their private credit sleeve each day.
Can Private Credit ETFs and Private Equity ETFs Improve Diversification?
Hampton: There’s an argument that private assets could help improve diversification. What do you think when you hear that, and what should folks consider before tweaking their portfolio?
Armour: It can. It depends on the private assets. Obviously, there are certain aspects in diversification that all private equity or all private credit will have exposure to. If you think about SpaceX, if markets drop or if there’s some sort of lack of funding for NASA, and government contracts no longer go out, that would impact SpaceX just as much as anyone else that relies on government contracts. If the economy falters, same thing for SpaceX. It would still be a challenge. In private credit, they’re subject to the same defaults as anyone else. Economic conditions deteriorate. There’s probably going to be more defaults. It really depends on the exact product, but there are some that are less correlated with public markets. They say the price isn’t moving, but that’s just because the marks don’t change every day. Are they actually uncorrelated? You can’t really look at performance. You really need to think about the underlying risks to the individual businesses or bonds.
What Investors Stand to Gain or Lose in Private Markets
Hampton: What do everyday investors stand to gain or lose in investing in private markets?
Armour: It’s really just performance, the opportunity cost of investing in something else. So, that’s the risk if you underperform the alternatives. If you were just to stick to public investing, would that get you to your goals? There’s opportunity potentially for outperformance or lower volatility of your investments by using private markets, but it’s no guarantee.
Why Private Equity and Private Credit ETFs Are Here to Stay
Hampton: Private equity ETFs and private credit ETFs are a new frontier of investing. That’s how it’s described for your session at MIC. Are these ETFs here to stay, or could they fade away?
Armour: I think they’re coming no matter what. So, it’s happening, and I think they will stay. I think we’ll look back a decade from now and things will look very different. I think there are a lot of people working on solving the problem of increasing transparency. How do we give investors the tools to be able to evaluate these things on their own? And I think Morningstar is one of the people leading that effort.
Hampton: I have a feeling we’re going to be talking about this for a while.
Armour: Yes, we will.
Hampton: Bryan, thank you for coming to the table. I can’t wait to attend your panel later this month.
Armour: Thanks so much. Can’t wait to see you there.
Hampton: Here are more details about the Morningstar Investment Conference. It will take place at Chicago’s Navy Pier on June 25 and June 26. Investing Insights will record an episode in front of a live audience, so meet us there. Find the registration link in the show notes. As always, thanks for watching and making this show part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.
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