This text was co-authored with Sourav Srimal, SVP, SOLVE.
The lately launched SPDR SSGA Apollo IG Public & Non-public Credit score ETF (PRIV) has obtained vital trade consideration as a result of it proposes to carry between 10% and 35% (and probably much more) of its portfolio in non-public credit score devices. This could exceed the 15% restrict on illiquid securities as stipulated by Rule 22e-4 of the Funding Firm Act of 1940. These non-public credit score devices shall be primarily, however not solely, sourced by Apollo World Securities. The fund obtained launch approval from the U.S. Securities and Change Fee regardless of Rule 22e-4 as a result of it entered into an settlement the place Apollo “has contractually agreed to supply intra-day, agency, executable bids” on non-public credit score investments that it has sourced. Due to this fact, in idea, buyers would count on PRIV to have significant publicity to non-public credit score.
Nevertheless, our evaluation of PRIV’s holdings exhibits that its non-public credit score publicity was solely round 5% as of March 3, 2025. Moreover, that 5% publicity contains securitized debt, and a enterprise growth firm issued bond, moderately than particular person non-public company debt. About 42% of PRIV’s publicity is in public company debt, together with 19% in securitized company mortgages and 15% in treasuries or money devices.
Liquidity Evaluation of PRIV Based mostly on TRACE Commerce Knowledge
Previous to PRIV’s launch, trade professionals had questions concerning the liquidity of the potential holdings, and the fund’s liquidity settlement with Apollo. The settlement requires Apollo to publish three executable citation sheets per day to purchase securities held in PRIV that had been sourced from Apollo. These quotes should be no worse than these provided to “equally located shoppers.” Apollo will settle for orders as much as a every day restrict, i.e., 25% of the fund’s holdings in an Apollo-sourced funding.
At present, this liquidity difficulty appears moot for the reason that fund’s publicity to non-public debt as of March 3, 2025, was extraordinarily low. As of that date, over 75% of the portfolio was liquid, with 62% extremely liquid. To evaluate the liquidity of the underlying portfolio, we used Commerce Reporting and Compliance Engine knowledge, as aggregated by SOLVE. We labeled constituent holdings that had traded within the trailing week (5 buying and selling days) as extremely liquid, these with current trades however exterior of the five-day window as reasonably liquid, and the remainder as illiquid. We then validated these trade-based liquidity classes utilizing the rely of bid-ask quotes within the trailing one-month interval from the SOLVE database. Utilizing these definitions, solely 16% of the portfolio is illiquid, and personal credit score accounts for under a small share of these illiquid securities (Determine 2).
Liquidity Comparisons to CLO ETFs Based mostly on Constituent Holders
One other lens into the liquidity of PRIV’s constituents is to look at how broadly they’re held by mutual funds, different ETFs or insurance coverage corporations. We in contrast PRIV, based mostly on this standards, with two Collateralized Mortgage Obligation constructed ETFs – the BondBloxx Non-public Credit score CLO ETF (PCMM) and the Janus Henderson AAA CLO ETF (JAAA).
On common (median), the constituents in PRIV had been held by 110 different mutual funds, ETFs or insurance coverage corporations. Solely 11% of the constituents had been held by fewer than 10 different funding automobiles. This means that PRIV’s holdings, on common, are broadly owned and traded. In distinction, there have been three different holders for the constituents of JAAA and 4 for PCMM, on common (median). Of the holdings in JAAA, 78% had been held by fewer than 10 different mutual funds, ETFs or insurance coverage corporations. The corresponding quantity for PCMM was 88%. This possession knowledge signifies that PRIV’s present holdings are liquid but in addition much less differentiated.
You will need to notice that PRIV is an lively ETF and will change its portfolio over time in favor of personal credit score devices sourced by Apollo. That may change the liquidity profile of the ETF over time.
Different Choices for ETF Buyers in Non-public Credit score
Previous to the launch of PRIV, buyers had two choices for publicity to non-public credit score by way of ETFs. The primary possibility included ETFs that maintain CLOs of personal loans, and the second possibility included those who maintain BDCs. Desk 2 compares PRIV to PCMM and to the VanEck BDC Earnings ETF (BIZD). ETF consumers spend money on these ETFs to generate yields which are larger than in conventional debt ETFs. BIZD and PCMM had 30-day SEC yields of 9.02% and seven.44%, respectively, as of March 3, 2025. PRIV has solely been buying and selling since February 26, 2025, so it has not but revealed a 30-day SEC yield. Its revealed yield to maturity as of March 3, 2025, was 5.44%. If it continues to carry primarily liquid investment-grade public debt, its yield shall be decrease than that of BIZD and PCMM, however this might change if its portfolio composition evolves to holding extra non-public debt.
Each PRIV and PCMM maintain investment-grade securities and have considerably decrease expense ratios than BIZD. BDCs could be costly to personal, leading to an especially excessive expense ratio of 13.33% for BIZD. BDCs are specialty finance corporations that primarily spend money on the debt and fairness of small- to mid-sized U.S. firms. Their debt investments embody senior secured, subordinated, and unsecured loans, whereas their fairness investments embody most well-liked and customary inventory. The low liquidity of the underlying loans poses a problem, making them riskier than conventional debt devices. Leveraging SOLVE’s crowdsourced knowledge, we discovered that solely 5.5% of BDC-held loans have pre-trade observable knowledge, amounting to a $21.5 billion value foundation. These loans had been primarily broadly syndicated loans. Provided that complete BDC asset underneath administration at value stood at $387.6 billion on March 3, 2025, which means that a overwhelming majority of senior secured portfolios, primarily First Lien and Second Lien loans, stay unquoted.
Whereas evaluating these three classes of personal credit score ETFs, buyers might want to commerce off these value, yield, liquidity, and credit score threat concerns.
Wanting Forward
PRIV was launched with vital investor anticipation because of its distinctive method to creating non-public credit score out there to ETF buyers. Its liquidity association with Apollo is seen as an revolutionary solution to handle the 15% restrict on illiquid securities as stipulated by Rule 22e-4 of the Funding Firm Act of 1940. Nevertheless, as of March 3, 2025, the fund solely had 5% of its portfolio in non-public credit score. Whereas this ensures that its portfolio is liquid, it additionally makes it much less differentiated relative to different fixed-income funds, since its constituents are broadly held by mutual funds and different ETFs. Going ahead, it appears possible that this actively managed ETF will begin to tackle extra non-public credit score that’s sourced from Apollo. This shall be essential for buyers to watch since a future tilt within the portfolio to extra non-public debt will change the credit score high quality and liquidity profile of the ETF over time.
