There's an ETF for That? Private Credit

Barings Corporate Investors (MCI)

MCI isn't an ETF—it's a closed-end fund (CEF). This means it lacks the typical ETF creation/redemption mechanism and can trade at significant discounts or premiums to its net asset value (NAV). Active since 1971, I think MCI is a great example of the potential foundation for a private credit ETF.

MCI primarily invests in what is called privately placed, below-investment grade, long-term debt obligations. These investments usually come from smaller U.S. companies and often include equity features like warrants, conversion rights, and sometimes preferred stocks.

These types of investments are less liquid than those found in the public markets, which is why MCI's closed-end structure really comes in handy—it allows the fund to hold onto these assets without needing to sell them simply because investors are buying or selling the fund itself.

And it's not just about stability; MCI has been a strong performer too. From its inception to now, it's posted a total return of 12.24% annualized based on NAV, outpacing many equity funds. This goes to show just how effective investing in private credit can be when you've got the right structure in place.

Virtus Private Credit Strategy ETF

VPC

+0.77%

Before the recent wave of filings, the Virtus Private Credit Strategy ETF

offered what might be considered the closest thing to direct private credit exposure, though it did so in a roundabout way.

VPC invests primarily in both closed-end funds (CEFs) and business development companies (BDCs) that themselves hold private credit investments such as collateralized loan obligations (CLOs), mezzanine loans, and bank loans.

What does this setup provide? Well, it offers an indirect, proxy exposure to financing for small- and mid-sized public and private businesses—a sort of side door into the world of private credit. Thanks to these assets, VPC is able to payout a very high 11.07% 30-day SEC yield.

One crucial point to consider with VPC is its fee structure. The management fee sits at 0.75%, but the total expense ratio is a staggering 9.72%. But before you balk at that figure, it's essential to understand why it's so high. This number includes a figure called "Acquired Fund Fees and Expenses" (AFFE), which are indirect expenses.

VPC needs to list these because it primarily holds BDCs and CEFs—each of which has its own management fees. These costs are implicitly reflected in the prices of the BDCs and CEFs within the portfolio and are not additional charges deducted directly from the fund's assets.

VanEck BDC Income ETF

BIZD

-0.08%

BIZD holds BDCs, which have historically served as Main Street's primary public vehicle for accessing private credit and equity exposure typically reserved for institutional investors.

BIZD tracks the MVIS US Business Development Companies Index and holds a portfolio of around 27 BDCs, including well-known names like Ares Capital, KKR Capital, Main Street Capital, and the Blackstone Secured Lending Fund.

These BDCs primarily lend to mid-market private companies that are often below investment grade or not rated at all. This is where the ETF's enticing 10.57% 30-day SEC yield originates; these loans typically offer higher returns due to their increased risk.

Concerning fees, BIZD presents a similar scenario to some other niche funds. While the management fee is relatively modest at 0.4% and other expenses add up to 0.02%, the AFFE is significantly higher at 12.91%, leading to a total operating expense of 13.33%.

But again, don't let this high number deter you prematurely—it includes the expenses of the BDCs within the fund, which, like with VPC, are reflected in the prices of the BDCs and are not direct charges against the fund's assets. This fee structure is typical of funds that invest in other funds, and it's important to understand this nuance when considering an investment in BIZD.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.