State Street Launches First Private Credit ETF with Apollo on NYSE

State Street Global Advisors (NYSE: STT), in collaboration with alternative investment giant Apollo Global Management (NYSE: APO), has launched the first-ever private credit exchange-traded fund (ETF) on the New York Stock Exchange. The SPDR SSGA Apollo IG Public & Private Credit ETF, which began trading on Thursday, marks a significant milestone in providing retail investors with direct exposure to a diversified portfolio of private credit assets.

A New Era for Retail Investors

Private credit, an asset class that has been around for over three decades, is now accessible to everyday investors through this innovative ETF. Michael Weisz, CEO of YieldStreet, a private market investment platform, emphasized the importance of private credit in modern portfolios. “Having those private assets is fundamental to building a healthy portfolio nowadays,” he said. “The ETF delivery mechanism allows ordinary investors to add it to their portfolios.”

The ETFs launch comes at a time when private credit is gaining traction as a viable alternative to traditional fixed-income investments. However, the inclusion of private credit in an ETF structure has not been without challenges.

Overcoming Regulatory Hurdles

One of the primary obstacles for ETF providers has been the U.S. Securities and Exchange Commissions (SEC) restriction on illiquid assets, which limits funds to holding no more than 15% of such assets. State Street, however, has managed to navigate this constraint by securing a backup liquidity agreement with Apollo, allowing the ETF to hold up to 35% of its assets in private securities.

Brian Moriarty, an analyst at Morningstar, described this arrangement as “a creative way around the SEC‘s definition of illiquid.” The final prospectus outlines Apollo’s role in originating private credit assets and its commitment to providing liquidity through firm bids. State Street also added flexibility to trade with other buyers and sellers of private credit, a move that was crucial for SEC approval.

Kirsten Chang, a senior industry analyst at VettaFi, noted, “That seems to have been necessary to get the SEC to sign off on what remains a very complicated structure. Its performance and liquidity will be very closely monitored.”

Liquidity Concerns and Market Response

Despite the innovative structure, concerns about liquidity remain. Neal Epstein, vice president of private credit at Moody‘s Ratings, highlighted the inherent illiquidity of private credit. “Private credit is inherently illiquid,” he said. In the event of a market selloff, investors may rush to sell their ETF shares, requiring the issuer to offload underlying securities quickly. Apollo’s liquidity commitment has a daily limit, though the exact figure remains undisclosed.

VettaFis Chang added, “There is no guarantee that other buyers will step in.” However, Nate Eisenberg, product manager of private credit at Allvue, believes these concerns are overstated. “What was a tremendously illiquid market is now much more able to deliver liquidity to support these ETF products,” he said.

Market Performance and Fees

The new ETF carries an expense ratio of 0.7% and saw minimal price movement on its first trading day, closing at $25.09, down 4 cents or 0.14%. Data on first-day inflows will be available later on Friday.

This ETF is the first product to emerge from State Streets recent partnerships with non-traditional investment firms. It reflects a growing trend of blending alternative assets with traditional ETF structures to meet evolving investor demands.

For investors eyeing State Street (STT) as a potential addition to their portfolios, tools like ProPicks offer valuable insights. ProPicks, powered by AI, has identified high-performing stocks in 2024, including two that surged over 150%, four that jumped more than 30%, and three that climbed over 25%. With portfolios tailored for Dow, S&P, Tech, and Mid Cap stocks, ProPicks provides a strategic edge in navigating the market.

Conclusion

The launch of the SPDR SSGA Apollo IG Public & Private Credit ETF represents a groundbreaking development in the ETF space, bridging the gap between private credit and retail investors. While liquidity concerns persist, the innovative structure and Apollos backing provide a compelling case for its success. As the market evolves, this ETF could pave the way for more alternative asset offerings, reshaping the investment landscape for years to come.