Private Credit ETF Stress Test: Navigating Liquidity Concerns and Market Volatility

Fears of a private credit crisis are escalating as firms within this increasingly significant but less liquid and transparent bond market grapple with investor redemptions. This stress test arrives precisely as private loans have become more integrated into the ETF landscape. It was just over a year ago that the Securities and Exchange Commission (SEC) gave its approval to the first ETF explicitly branded as a private credit fund. For ETF investors, a silver lining is that the inherent risks of this asset class are manifesting in a more controlled environment. ETFs that invest directly in private credit issuances are currently subject to a cap on their exposure, limited to a maximum of 35%.

Todd Rosenbluth, head of research at VettaFi, explained on CNBC’s "ETF Edge" that some older ETF products gain indirect exposure to private credit. These funds utilize vehicles such as business development companies (BDCs) and closed-end funds, which predominantly invest in the private credit sector. While this structure offers enhanced liquidity compared to holding private loans directly, it has not shielded investors from concern in the current market climate.

The VanEck BDC Income ETF (BIZD), a fund with approximately $1.5 billion in assets and established in 2013, has experienced a 13% decline since the beginning of the year. This performance is largely attributable to its top holdings, which include publicly traded shares of prominent private credit managers currently in the news, such as Blue Owl Capital and Ares Capital. Notably, Blue Owl shares have plummeted over 46% year-to-date. Similarly, the Simplify VettaFi Private Credit Strategy ETF (PCR), which also focuses its investments on business development companies and closed-end funds, has seen a roughly 20% decrease in value over the past year.

Liquidity remains the paramount concern for investors. Private credit is inherently not designed for the daily trading characteristic of ETFs, leading to friction between private credit managers and investors seeking to withdraw their capital. However, within the ETF structure, daily liquidity and trading provide investors with the continuous option to sell, albeit potentially at a cost. Rosenbluth elaborated, "You can get out, you’re just going to pay or you’re going to sell at a discount to net asset value." BIZD, for instance, closed at a discount to its net asset value on 37 occasions during the calendar year 2025 and has done so 12 times so far this year.

In contrast, private credit funds often implement withdrawal restrictions during periods of market stress. Rosenbluth likened this to a "gating" mechanism, stating, "You’re gating because you said we can’t have a run on the bank." While these redemption limits are intended to prevent forced selling and maintain stability, they do not necessarily alleviate market anxieties.

State Street’s private credit ETFs, developed in collaboration with alternative investment manager Apollo Global, exemplify the evolving approach to accessing this asset class within the ETF framework. These products include the first SEC-approved private credit-branded ETF. The State Street IG Public & Private Credit ETF (PRIV), launched in February 2025, was the pioneer of its kind. It was subsequently followed by the State Street Short Duration IG Public & Private Credit ETF (PRSD) later in 2025.

These funds aim to surpass the performance of standard bond benchmarks by incorporating investment-grade private credit. They are permitted to hold up to 35% in private credit issuances, or at times, less than 10%. According to the State Street ETF website, only one of PRIV’s current top 10 holdings is in private credit, with treasury and mortgage-backed securities dominating its top holdings. PRSD’s top holdings comprise a mix of government, mortgage, and currency instruments.

PRIV manages $831 million in assets, while PRSD, a considerably smaller fund, holds $48 million in assets under management. Both ETFs have exhibited relatively flat performance since the beginning of the year. State Street data indicates that both PRIV and PRSD allocate slightly over 20% of their assets to investments sourced from Apollo.

Jeffrey Rosenberg, a senior portfolio manager of systematic fixed income at BlackRock, who manages a long-short strategy within an ETF wrapper, views the challenges in private credit ETFs as a testament to the profound changes ETFs have brought to the fixed income markets. He asserts that as active portfolio managers in the bond market increasingly reach investors through ETFs, it grants them greater precision in targeting specific segments of the credit market. Rosenberg commented on "ETF Edge," stating, "They’ve just completely changed how liquidity provisioning, price discovery… how the ecosystem of credit market-making functions in a modern credit market."

Rosenbluth of VettaFi observed that during recent market volatility, ETF investors have been actively "taking some risk off," shifting from longer-duration bond funds to shorter-duration alternatives.

The most significant systemic risk in private credit markets stems from the mismatch between assets and liabilities, a phenomenon Rosenberg described as a "run on the bank." However, he posits that this type of risk is less pronounced currently, as many private credit vehicles inherently limit liquidity. While this does not eliminate risk, it can lead to a more gradual surfacing of risks, allowing for potential impacts to manifest over longer time horizons as companies face refinancing at higher interest rates.

Both Rosenbluth and Rosenberg highlighted that this dynamic results in a system that absorbs shocks differently. Private credit funds may restrict redemptions, while ETFs facilitate continuous trading with real-time price adjustments. This allows markets to continue functioning while reflecting developing stress. They concluded that both approaches are designed to prevent disorderly outcomes.