In their quest for yield, individual investors discovered a new favorite: private credit ETFs. A corner of the market previously held by institutions and pension plans— private debt— has entered the mainstream through funds that offer access, income, and “alternative” exposure in the comfort of an ETF package.

But lurking in the background of this mania is a truth: all ETFs are not created equal.

Old-school index ETFs such as the SPDR S&P 500 ETF Trust (NYSE:SPY) or the Vanguard Total Stock Market ETF (NYSE:VTI) have been the go-to for their transparency, diversification, and daily liquidity for many years. Meanwhile, private credit ETFs and interval funds come with something more trendy, but opaque.

And that’s setting alarms off throughout the investment universe.

Transparency: Know What You Hold

One of the hallmarks of index ETFs is their extreme transparency. Investors know exactly what they’ve got. Holdings are reported daily, and performance is measured against a well-defined benchmark.

Private credit ETFs? Not really.

Although they may have names that imply exposure to private loans, they often contain a combination of high-yield bonds, leveraged loans, treasuries, and even listed equities.

Heron Finance, in its June Monthly Insights report, cautions that several so-called private credit ETFs offer little more than a “private-ish” experience.

Liquidity: The Illusion Of Easy Exit

Index ETFs are as liquid as the underlying stocks they mirror. SPY, for example, trades with extremely thin spreads and liquidity providing instant entry and exit, even during stress.

Private credit, by nature, is illiquid. But ETFs and interval funds are providing exposure to these assets in structures that guarantee periodic redemptions. This arrangement does come with one caveat: if everybody runs for the door at once, fund managers will be forced to unload tricky-to-value assets, possibly at a loss.

Morningstar indicates this as one of its main concerns: misalignments between liquid structures and illiquid assets can result in NAV mispricings, forced redemption, or trading at a discount in times of market stress.

Moody’s further suggests, as reported by a June Reuters report, that competition for deal flow may entice the managers to use lower-quality loans to supply investor needs, increasing the risk profile yet further.

Diversification: Broad Exposure Vs. Single-Minded Risk

An index ETF such as VTI contains thousands of names in sectors and market caps. It’s diversification by design.

Compare this to some private credit ETFs, where a single credit shop is the manager and where that fund often largely contains that manager’s own originated loans. This vertical integration can lead to concentration risk, where returns rely on the record and judgment of a single player.

That is a long way from the passive neutrality of an S&P 500 tracker.

One Size Doesn’t Fit All

Individual investors typically choose index ETFs to serve a range of objectives—long-term growth, low volatility, income, or tax efficiency. Mix-and-match flexibility enables simple customization of portfolios.

Private credit ETFs, as much as they pursue active strategies, aren’t as readily tailored. Investors are investing in a manager’s playbook, and have minimal control over how risk is allocated between senior loans, mezzanine debt, or covenant-lite structures. For those seeking specific objectives such as monthly income regularity or capital preservation, limited visibility can be a disadvantage.

So, what are investors getting?

The argument for private credit ETFs is simple: they provide access to an income-paying asset class historically available only to institutions. Yields on certain funds are over 8%–9% in 2025—significantly higher than the dividend yields of broad index ETFs.

But the argument against is what is not seen behind that yield:

Limited transparency
Complex structures
Potential liquidity mismatches
Single-manager exposure

As Heron, Moody’s, and Morningstar all insist, investors might be underestimating these risks.

Some Private Credit ETFs

As of 2025, the private credit ETF space continues to expand, and numerous funds combine private credit-like exposure (like CLOs, BDCs, and non-agency loans) as opposed to pure-play exposure. Below are some prominent ETFs in or near the private credit universe:

iShares J.P. Morgan USD CLO ETF (NASDAQ:CLOA)

Focus: Investment‑grade, predominantly AAA/AA CLO tranches
Notes: Offers floating‑rate exposure via a diversified CLO structure.
Expense ratio: 0.20%

Janus Henderson AAA CLO ETF (NYSE:JAAA)

Focus: Purely AAA‑rated CLO tranches
Notes: Emphasizes capital preservation with floating‑rate yield.
Expense ratio: 0.20%

Reckoner Leveraged AAA CLO ETF (NYSE:RAAA)

Focus: Actively managed AAA‑rated floating‑rate CLO bonds
Key Feature: Up to 50% leverage via reverse repos to boost yield
Expense ratio: 0.30%

Bottom Line

Private credit ETFs and index ETFs each occupy a niche in today’s portfolios, but they play fundamentally divergent roles.

As more individual investors move from SPY into structured credit ETFs, the issue isn’t whether one is preferable. It’s whether you know what you’re actually purchasing.

Read Next:

Trade War Or Trade Win? The Curious Case Of Surging Japan ETFs

Photo: Shutterstock

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Wednesday, July 23, 2025