Better Markets filed a Comment Letter to the Securities and Exchange Commission (SEC) in connection with a filing submitted by State Street and Apollo Global Management seeking approval for a private credit exchange-traded fund (ETF).

Why It Matters.Private credit involves lending by non-bank institutions, which means that private credit funds typically invest in illiquid debt investments. So the loans that private credit funds make are difficult to value because they rarely trade. As a result, the difficulty of valuing the loans in a private credit portfolio could lead investors in the funds to experience losses. In addition to unreliable valuations, the illiquid nature of the loans that private credit funds make poses additional risks. Investors in ETFs normally expect high liquidity. But it is unclear how retail investors could easily withdraw money from funds filled with illiquid assets.

What We Said. This application for a private credit ETF further blurs the line between the public and private markets. Exchange-traded funds normally offer retail investors a way to diversify their risk while investing in the public markets. But this ETF will expose retail investors to private credit, a subset of the private markets usually open only to sophisticated market participants. Retail investors may not understand the risks of this asset class. Consequently, rather than mitigating their risk, this ETF could leave retail investors unprotected.

Bottom Line.The risks of private credit mean that any attempt to form a private credit ETF must include rigorous investor protection measures. But this application does not contain sufficient information to ameliorate the concerns about potentially unreliable valuations and a lack of liquidity. The application lacks the necessary protections that retail investors deserve.

The Comment Letter is available here.