Fears of a burgeoning private credit crisis are intensifying, casting a critical spotlight on firms at the heart of this rapidly expanding, yet inherently less liquid and transparent, bond market. As these private credit behemoths face mounting investor redemption requests, a crucial stress test has arrived, coinciding with the asset class’s increasing prevalence within the exchange-traded fund (ETF) market. It was barely over a year ago that the Securities and Exchange Commission (SEC) gave its landmark approval to the first ETF explicitly branded as a private credit fund, heralding a new era of access for retail and institutional investors alike.
The current turbulence, however, is illuminating the intricate balance between accessibility and the inherent risks associated with private lending. For ETF investors, a silver lining appears to be the somewhat controlled manner in which these risks are manifesting. Direct investments by ETFs into private credit issues are currently capped, not exceeding 35% of a fund’s total exposure, a regulatory guardrail designed to mitigate concentrated risk. This limitation contrasts sharply with traditional private credit funds, which can be fully immersed in the asset class.
The Rise of Private Credit and Its ETF Integration
The private credit market has experienced meteoric growth over the past decade, ballooning from an estimated $400 billion in assets under management in 2015 to over $1.7 trillion by 2024, with projections suggesting it could exceed $2.5 trillion by 2027. This expansion was fueled by several factors: banks pulling back from certain lending activities post-financial crisis, a prolonged period of low interest rates pushing investors to seek higher yields, and private equity firms increasingly turning to direct lenders for financing their leveraged buyouts. Private credit offered bespoke financing solutions, often with higher interest rates and more flexible terms than traditional bank loans or public bonds, appealing to both borrowers and investors.
The integration of private credit into the ETF ecosystem marked a significant evolution, democratizing access to an asset class traditionally reserved for large institutional investors. In February 2025, the SEC’s approval of the first private credit-branded ETF, a collaboration between State Street and alternative investments manager Apollo Global, was seen as a watershed moment. This development was intended to provide investors with diversified exposure to private credit while leveraging the daily liquidity and transparency benefits of the ETF wrapper.
However, many older ETF products tied to private credit gain exposure indirectly, primarily through vehicles like Business Development Companies (BDCs) and Closed-End Funds (CEFs). These entities primarily invest in the private credit sector and are publicly traded, offering a layer of liquidity that direct private loan holdings lack. Yet, as Todd Rosenbluth, head of research at VettaFi, highlighted on CNBC’s "ETF Edge," even this indirect exposure is not immune to investor concerns in the current volatile environment.
Market Volatility and Performance Fallout
The stress test on private credit has translated into noticeable performance dips for several ETFs with exposure to the sector. The VanEck BDC Income ETF (BIZD), a significant player with approximately $1.5 billion in assets under management and a history dating back to 2013, has experienced a decline of 13% since the start of the current year. The reasons for this downturn are transparent: BIZD’s top holdings include publicly traded shares of some of the very private credit managers currently facing scrutiny, such as Blue Owl Capital and Ares Capital. Blue Owl shares, in particular, have been hit hard, plummeting over 46% this year amid the broader market apprehension surrounding private credit.
Another fund, the Simplify VettaFi Private Credit Strategy ETF (PCR), which also focuses its investments on business development companies and closed-end funds, has seen its value decrease by approximately 20% over the past year. These performance figures underscore the contagion effect spreading from the less transparent direct lending market to its publicly traded counterparts and indirectly exposed ETFs. The declines are a direct consequence of rising defaults, concerns over loan quality, and the broader economic slowdown impacting the ability of privately held companies to service their debts.
The Liquidity Conundrum: ETFs vs. Traditional Funds
At the core of the current anxieties lies the fundamental issue of liquidity, particularly the asset-liability mismatch inherent in private credit. Private credit investments, by their very nature, are illiquid. They involve direct lending to private companies, often with long lock-up periods and limited secondary markets for trading the loans. This structure is diametrically opposed to the daily trading and liquidity that investors expect from ETFs.
Jeffrey Rosenberg, systematic fixed income senior portfolio manager at BlackRock, who manages a long-short strategy within an ETF framework, emphasized how ETFs have fundamentally reshaped fixed income markets. He noted, "They’ve just completely changed how liquidity provisioning, price discovery…how the ecosystem of credit market-making functions in a modern credit market." However, this innovation also brings into focus the tension between a traditionally illiquid asset class and a daily liquid wrapper.
In traditional private credit funds, managers often restrict withdrawals during periods of market stress to prevent a "run on the bank." Rosenbluth explained, "You’re gating because you said we can’t have a run on the bank." These gates, or redemption limits, are crucial for preventing forced selling of illiquid assets at fire-sale prices, thereby preserving value for remaining investors and maintaining fund stability. While this practice can be frustrating for investors seeking immediate access to their capital, it is a built-in mechanism to manage illiquidity.
ETFs, by contrast, offer continuous trading on exchanges throughout the day, providing investors with the option to sell their shares at any time. However, this liquidity can come at a cost, especially during times of heightened stress. As Rosenbluth cautioned, "You can get out, you’re just going to pay or you’re going to sell at a discount to net asset value." This phenomenon is evident in the performance of funds like BIZD, which closed at a discount to its net asset value (NAV) 37 times in calendar year 2025, and an additional 12 times so far this year. This discount reflects market participants’ perception of the underlying assets’ illiquidity and the inherent uncertainty in valuing private loans in a volatile market.
Regulatory Safeguards and Structural Design
The SEC’s initial approval of private credit ETFs, particularly the State Street IG Public & Private Credit ETF (PRIV), demonstrated a cautious approach to integrating this asset class into a public, liquid wrapper. PRIV was the first of its kind, approved in February 2025, followed by the State Street Short Duration IG Public & Private Credit ETF (PRSD) later that year. These funds were designed with specific limitations and a broader investment mandate, aiming to outperform standard bond benchmarks by including investment-grade private credit.
Crucially, both PRIV and PRSD are permitted to hold a maximum of 35% in private credit issues, with actual allocations sometimes falling below 10%. This cap is a significant regulatory safeguard, ensuring that the majority of the funds’ portfolios are comprised of more liquid, publicly traded securities. According to State Street’s ETF website, only one of PRIV’s current top 10 holdings is private credit, with treasury and mortgage-backed securities dominating the rest. Similarly, PRSD’s top holdings are a mix of government, mortgage, and currency holdings, reflecting a diversified approach rather than concentrated private credit exposure.
PRIV currently manages $831 million in assets, while PRSD is considerably smaller at $48 million. Both have exhibited relatively flat performance since the beginning of the year, indicative of the cautious positioning and the mitigating effect of their broader, more liquid holdings. State Street data also indicates that both funds hold slightly over 20% of their assets in Apollo-sourced investments, demonstrating the strategic partnership at play.
Broader Implications and Future Outlook
The current market volatility and the stress on private credit funds are serving as a crucial test case for the resilience of the broader financial system and the evolving role of ETFs within it. VettaFi’s Rosenbluth observed that ETF investors have been "taking some risk off," shifting capital from longer-duration bond funds into shorter-duration alternatives, a common flight to safety during uncertain periods.
BlackRock’s Rosenberg elaborated on the systemic risk, primarily stemming from the asset-liability mismatch, describing it as the "run on the bank" scenario. However, he posited that this risk might be less pronounced today in private credit, precisely because many private credit vehicles are designed with built-in liquidity limitations. While these limitations don’t eliminate risk, they can cause risks to surface more gradually, potentially over longer time horizons as companies face refinancing at significantly higher rates. This "slow burn" scenario, rather than an abrupt collapse, could allow the system more time to absorb shocks.
Both experts concluded that the differing mechanisms of private credit funds (redemption restrictions) and ETFs (continuous trading with real-time price adjustments) aim to prevent disorderly market outcomes. ETFs allow for immediate price discovery and trading, reflecting stress as it develops, while private funds restrict withdrawals to avoid forced asset sales. Both approaches, despite their differences, are intended to manage liquidity risk and maintain market functioning, albeit with varying degrees of immediate investor access.
Looking ahead, the private credit market’s trajectory will be heavily influenced by macroeconomic factors, particularly interest rate movements and the health of the global economy. As central banks continue to grapple with inflation, higher borrowing costs will inevitably pressure highly leveraged private companies, potentially leading to increased defaults and further valuation adjustments.
For the ETF industry, this period of stress offers valuable lessons in product design, risk management, and investor education. The cautious approach taken by regulators and fund managers, particularly the limited exposure caps and diversified holdings, appears to be cushioning the blow for many private credit-linked ETFs. However, the experience also highlights the imperative for investors to understand the underlying assets, the liquidity mechanisms of their chosen funds, and the potential for discounts to NAV during periods of stress.
The evolving landscape of private credit and its integration into public markets via ETFs represents a frontier where innovation meets inherent market challenges. While the current turbulence is testing the boundaries, it is also fostering a more nuanced understanding of risk and liquidity, ultimately shaping a more robust and transparent financial ecosystem for the future.
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