Look Forward — 26 June 2025
Exchange-traded funds: Expanding access to finance’s future
Crypto ETFs and private credit ETFs provide a point of entry to new assets using the existing infrastructure of financial markets.
By Evan Gunter, Thomas Schopflocher, Maya Beyhan, Ph.D., David Easthope, and Michelle Ho
Highlights
As private credit and tokenization enable the transformation of capital markets, access remains a barrier to entry for many investors.
Exchange-traded funds (ETFs) offer a point of entry to new assets by providing a wrapper that simplifies purchasing through an exchange, using the existing infrastructure of financial markets.
Despite their allure, financial innovations can introduce new risks and complexities for investors. Part of the appeal of a crypto ETF or private credit ETF is the ease of access and liquidity for trading, but this can result in a mismatch when the underlying asset is less liquid.
ETFs are a well-known investment vehicle and have proven their adaptability over time. Changes, both within markets and from external factors, bring risk. While investors can access new types of assets through crypto ETFs and private credit ETFs through a vehicle that relies on the existing financial market infrastructure, this could lead to complications because of a lack of liquidity.
ETFs can accommodate different assets
As capital markets evolve, nascent assets initially may be less accessible or difficult to trade. A broader range of private credit and crypto assets presents various challenges to accessibility and liquidity, but they are increasingly integrated into portfolios through the traditional financial infrastructure within an ETF wrapper.
ETFs of collateralized loan obligations (CLOs) may be an instructive example of how financial innovations can gain traction. CLOs were an established financial asset for nearly 30 years prior to the creation of the CLO ETF. But within two years of the launch of the first CLO ETF, the total assets under management within the ETF market had increased tenfold to $30 billion, giving ETF managers sufficient scale to anchor some recent CLO transactions themselves.
ETFs offer the flexibility to adapt to new trends and investment themes by holding baskets of underlying assets that can be bought and sold on an exchange. This structure can provide diversification for investors and simplify the purchasing process through a public exchange.
Despite their allure, financial innovations introduce new risks and complexities for investors. Not all innovations achieve success, and not all financial products are broadly suitable. Some may carry new or unknown risks, and ETF investments can vary in fundamental ways, making those risks far less transparent. In other words, investors should take a closer look at the fine print.
The overnight success of CLO ETFs
CLOs have been around for over 30 years, establishing a solid track record through multiple credit cycles while serving a narrow, traditional investor base of large banks and insurance companies.
The first CLO ETFs were launched in 2020 and grew rapidly, doubling or even tripling in value quarter over quarter since 2023, reaching $30 billion in AUM as of the first quarter of 2025. These funds injected new liquidity into CLO primary and secondary markets, with demand catching on among retail investors.
The largest CLO ETFs, such as Janus Henderson’s JAAA, typically focus on the AAA tranches of CLOs of broadly syndicated loans, which represent the more liquid segment of the CLO market. However, the market is broadening: Newer funds are targeting either mezzanine (or BBB) tranches of broadly syndicated CLOs or senior tranches of middle-market CLOs, which invest in private credit loans.
Although ETFs own just roughly 3% of the US CLO market, the largest CLO ETFs already anchor some new CLO issues in the primary market. This influx of demand from ETFs for CLOs appears to be lowering the cost of funding for new CLOs.
While ETF ownership is typically under 10% of the outstanding CLO tranche balance, it is not uncommon for ETFs to own between 10% and 30% of a tranche. For a CLO with substantial ETF ownership, these funds may provide a stable source of liquidity, price transparency and higher routine trade volume for CLO notes in the secondary market.
Liquidity considerations for CLO ETF investments
CLO tranches can be traded, but volume is thin compared to shares of an equity ETF, such as SPY. While this creates a liquidity mismatch between the underlying assets and the ETF, the ETF structure is designed to mitigate this risk.
The ETF structure differs from that of an open-ended mutual fund, which must meet redemption requests from investors, potentially leading to asset sales. ETFs face no such obligation to sell portfolio assets, as investors simply sell shares on the exchange when they seek to liquidate a position.
However, this can lead to situations where the price of the ETF may move more quickly than that of the underlying assets. In such cases, the ETF's share price can deviate from its net asset value (NAV) per share. Open-ended mutual fund shares, on the other hand, will reprice to the NAV at the end of each trading day.
ETFs are not required to rectify this price/NAV mismatch, which is measured as a premium or a discount. Typically, disparities between an ETF's share price and its underlying portfolio value are arbitraged by secondary market investors' opportunistic trading of the ETF shares and the ability of authorized participants to create or redeem ETF shares. These market-balancing actions tend to drive NAV per share and the ETF's share price toward parity.
CLO ETFs face market challenges
CLO ETFs faced their first test of resilience in April 2025, during the volatility following the US government’s tariff announcements. Outflows from CLO ETFs surged to nearly 10% of their total AUM in the four weeks to April 16, 2025.
During this volatile period, some of the larger AAA CLO funds traded at discounts of 1% to 1.5% below NAV, while less-liquid mezzanine or private credit CLOs traded at discounts of 4% to 6%. In almost all cases, however, these discounts swiftly dissipated by the month’s end as markets stabilized and inflows resumed.
Crypto ETFs emerge
Cryptocurrencies first appeared with the launch of bitcoin in 2009, creating a decentralized ledger system using blockchain technology. This innovation revolutionized the way individual transactions can be executed by removing the need for intermediaries such as banks or financial institutions. Although the journey has not been smooth, today most investors recognize cryptocurrencies as an asset class, held in the portfolios of retail and institutional investors alike.
Bitcoin and ethereum are the largest cryptocurrencies, together representing over 75% of the $2.5 trillion market cap of the broader digital market.
As institutional interests and trading volumes increase, and with an expanding mix of assets and platforms, the need for more robust market infrastructure becomes more pressing.
Crypto ETFs create an elegant solution to investor challenges
According to research from Crisil Coalition Greenwich, demand for institutional-grade, institutionally focused markets and technology infrastructure for crypto trading has ballooned in recent years, bringing new opportunities and challenges.
One key concern for crypto investors and traders is slippage, which occurs when the price moves against the trader when they try to buy or sell larger orders. Although digital markets have round-the-clock trading and instant settlement capabilities, they often lack the depth of liquidity for large trades due to the nascent nature of some assets and market fragmentation.
Another concern is information leakage, particularly in the case of public blockchains on which transactions can be monitored in real-time. This includes monitoring activity around the largest institutional crypto wallets. Counterparty risk is another key concern because some exchanges are lightly regulated and the custodian rules that apply to traditional assets are much different for crypto assets, necessitating enhanced technology support and security.
New venues to trade crypto are emerging, including, potentially, nationally regulated venues such as exchanges and alternative trading systems. At the same time, investors — particularly those who do not want or need to own these assets directly — can turn to the familiar and increasingly popular ETF, whose structure allows them to gain crypto exposure. In many ways, the crypto ETF structure addresses the challenges faced by institutions that wish to buy, hold or sell crypto easily.
The first spot bitcoin ETF in the US was approved by the Securities and Exchange Commission in January 2024, although earlier bitcoin-focused funds, trusts and exchange-traded products date back to 2021. The response to, and popularity of, the first bitcoin ETF was overwhelming, unlocking the market. Since then, investor inflows into crypto ETFs have been very strong.
The AUM of crypto ETFs more than doubled from the end of the first quarter of 2024 to year-end 2024, surpassing $120 million. However, this growth has been volatile.
The simple point-and-click ease of trading an ETF, such as via an online brokerage account, brought major accessibility improvements to the markets. First, it offers a simple buy-and-sell experience through established channels. Second, and most importantly for institutions, trading shares of an ETF means the custody of the underlying asset is managed by a well-established technology provider. Investors do not have to manage self-custody or trust an exchange-based custody approach. ETFs provide a simple wrapper that allows investors to trade crypto exposures listed on a regulated exchange, through an established broker relationship where they can benefit from the existing infrastructure, including tax reporting, and through the plumbing of traditional financial markets.
The digital market continues to see a rapid proliferation of altcoins, stablecoins, DeFi tokens, meme coins and other tokenized assets. Moving forward, crypto ETF issuers are targeting Ripple, Solana and even some meme-coin assets, with multi-asset ETFs also in the mix.
Private credit ETFs could expand the investor base
Private markets offer a large pool of diverse investments, yet they attract little retail investment. In the US alone, the mass-affluent and middle markets, representing more than 40 million households, hold over $21 trillion in investable assets. Despite the established presence of alternative assets, which account for 10%-15% of global assets and are growing, mass-affluent investors allocate less than 1% of their portfolios to private markets.
Access to alternative assets such as private credit has traditionally been limited to high net worth, qualified and institutional investors. While recent launches of nontraded business development companies and interval funds are marketing to a broader mix of affluent retail investors, index-based solutions may facilitate a broader distribution of private credit to a larger retail market through ETFs.
Compared to crypto ETFs, private credit ETFs are still in their early days. Only a handful have been launched thus far, including the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) and the Virtus Private Credit Strategy ETF (VPC), which target private credit broadly. Others have approached the market with a focus on private credit CLOs or business development companies.
In the portfolios of existing private credit ETFs, including PRIV and VPC, much of the collateral consists of investment-grade credit, including US Treasurys and agency debt, business development companies, nonbank financial lenders, and securitized assets such as CLOs.
Notably, the recently launched PRIV from State Street and Apollo plans to allocate between 10% and 35% of the fund’s portfolio to private credit, which may exceed the regulatory limit of 15% for illiquid investments. Apollo navigated this roadblock by contractually agreeing to provide executable intraday bids on all investments it originates that PRIV will hold, and to buy back private credit assets where required, essentially making and underwriting the market.
This raises questions about the availability of redemption requests on demand. It remains to be seen whether this much-needed solution, which addresses the inherent liquidity mismatch, will endure. However, by providing a liquid wrapper around an illiquid investment, this private credit ETF meets rising demand from retail investors for entry to a market typically accessed only by institutional investors.
ETFs introduce a new route for price discovery in private credit, addressing concerns of transparency. Because ETFs are traded at scale on public exchanges, their volume can easily outpace that of the underlying loan assets, which could lead to premiums or discounts to NAV of the private credit ETF.
Certain characteristics of private credit and alternatives suggest that these assets may not be a good fit for all investors. Private credit and other alternatives have been limited to certain groups of qualified investors because the underlying assets often have limited secondary market activity and complex instruments; these assets also lack liquidity and the same depth of transparency as assets in public markets. Risks associated with new financial innovations can be high and are often complex to evaluate.
Connecting to the future of capital markets
Markets naturally change and adapt, disrupt and evolve. CLO ETFs may provide an instructive example of how adoption of a new asset can move slowly but then rapidly gain momentum. We expect the future to bring ever more innovation and newer asset classes to market. The variety of assets in private credit and crypto is proliferating, with new and varied instruments emerging. While investors may face technical or other hurdles in accessing new assets, ETFs can provide a familiar wrapper for unfamiliar assets, such as in crypto ETFs and private credit ETFs. Innovations and new technologies such as private credit and tokenization may be creating the infrastructure for the future of capital markets, and some of the building blocks of this future already sit in the ETF portfolios of today.
Performance disclosure
Please refer to the methodology for any particular index for more details about that index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the index is set to a fixed value for calculation purposes. The Launch Date designates the date when the values of an index are first considered live: index values provided for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the public, for example via the company’s public website or its data feed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but that may have been prior to the Index’s public release date.
All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. However, when creating back-tested history for periods of market anomalies or other periods that do not reflect the general current market environment, index methodology rules may be relaxed to capture a large enough universe of securities to simulate the target market the index is designed to measure or strategy the index is designed to capture. For example, market capitalization and liquidity thresholds may be reduced. Complete index methodology details are available at www.spglobal.com/spdji/en. Past performance of the Index is not an indication of future results. Back-tested performance reflects application of an index methodology and selection of index constituents with the benefit of hindsight and knowledge of factors that may have positively affected its performance, cannot account for all financial risk that may affect results and may be considered to reflect survivor/look ahead bias. Actual returns may differ significantly from, and be lower than, back-tested returns. Past performance is not an indication or guarantee of future results. Please refer to the methodology for the Index for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. Back-tested performance is for use with institutions only; not for use with retail investors.
Typically, when S&P DJI creates back-tested index data, S&P DJI uses actual historical constituent-level data (e.g., historical price, market capitalization, and corporate action data) in its calculations. As ESG investing is still in early stages of development, certain datapoints used to calculate S&P DJI’s ESG indices may not be available for the entire desired period of back-tested history. The same data availability issue could be true for other indices as well. In cases when actual data is not available for all relevant historical periods, S&P DJI may employ a process of using “Backward Data Assumption” (or pulling back) of ESG data for the calculation of back-tested historical performance. “Backward Data Assumption” is a process that applies the earliest actual live data point available for an index constituent company to all prior historical instances in the index performance. For example, Backward Data Assumption inherently assumes that companies currently not involved in a specific business activity (also known as “product involvement”) were never involved historically and similarly also assumes that companies currently involved in a specific business activity were involved historically too. The Backward Data Assumption allows the hypothetical back-test to be extended over more historical years than would be feasible using only actual data. For more information on “Backward Data Assumption” please refer to the FAQ. The methodology and factsheets of any index that employs backward assumption in the back-tested history will explicitly state so. The methodology will include an Appendix with a table setting forth the specific data points and relevant time period for which backward projected data was used.
Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices maintains the index and calculates the index levels and performance shown or discussed but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three-year period, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200).
This article was authored by a cross-section of representatives from S&P Global. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.
Content Type
Research Council Theme