Why Private Credit Is Eating the Bank’s Lunch - and You’re Still in ETFs
- Steadfast Equity
- Jun 17
- 10 min read
Updated: Jun 20
Private credit is growing fast, now a $1.7 trillion market, and could hit $2.6 trillion by 2029. It offers higher yields (9–12%), customized terms, and floating rates that hedge against rising interest rates - advantages traditional ETFs can't match. But private credit comes with illiquidity, higher risks, and limited transparency, making it less accessible to everyday investors.
ETFs, on the other hand, are liquid, low-cost, and transparent, offering easy access to bond markets. They’re ideal for those seeking simplicity and flexibility, even if the yields are lower (3–6%).
Quick Overview:
- Private Credit: High yields, illiquid, customizable, less regulated.
- ETFs: Lower yields, highly liquid, standardized, highly regulated.
Feature | Private Credit | Fixed-Income ETFs |
Yield Potential | 9–12% | 3–6% |
Liquidity | Illiquid | Highly liquid |
Minimum Investment | High barriers | Low barriers |
Customization | Highly customizable | Standardized |
Transparency | Limited | High |
Regulation | Less regulated | Highly regulated |
If you’re after higher returns and can commit long-term, private credit might be worth exploring. For simplicity, liquidity, and accessibility, ETFs remain a solid choice.
ETF Edge: The controversial rise of private credit in ETFs
1. Private Credit
Private credit has grown from a niche investment option into a massive $1.7 trillion market. Unlike traditional bank loans or public bonds, private credit operates in a more flexible, tailored environment, offering unique advantages for both borrowers and investors that public markets can't replicate.
Yield Potential: Higher Returns for Added Complexity
Private credit investments often deliver returns in the 9–12% range. In practice, loans in this space typically yield 7–9%, whereas investment-grade corporate bonds hover around 3%. This difference is largely due to the illiquidity and complexity premiums tied to private credit. Beyond attractive yields, these investments often come with deal-specific perks, offering a compelling blend of risk and reward.
Customization: Flexible Terms for Borrowers
One of private credit's standout features is its flexibility. Borrowers can negotiate loan terms - including repayment schedules, interest rates, and covenants - in ways that are rarely available with public debt instruments. Additionally, private credit deals often close faster than traditional bank loans, thanks to fewer regulatory hurdles.
To better understand the differences between public and private credit, consider the following comparison:
Feature | Public Fixed Income | Private Credit |
Liquidity | Traded publicly with high liquidity | Less liquid, limited secondary market access |
Yields | Market-driven yields | Higher yields due to illiquidity premiums |
Structure | Standardized terms | Customizable, offering greater flexibility |
Regulation | Heavily regulated (SEC, FINRA, Fed oversight) | Less regulated, allowing tailored agreements |
Risk Factors: Balancing Rewards and Challenges
While private credit offers higher returns, it comes with its own set of risks. Credit risk is a key concern, as these loans often target borrowers deemed riskier by traditional banks. Although default rates in private credit are generally low compared to syndicated loans or high-yield bonds, recovery rates tell a different story. On average, private credit loans recover about 33% post-default, compared to 52% for syndicated loans and 39% for high-yield bonds.
Illiquidity is another challenge. With no robust secondary market, private credit investments can be tough to exit quickly, often requiring long-term capital commitments. Additionally, rising competition in the space - highlighted by private equity dry powder projected to hit $1.6 trillion by the end of 2024 - has raised concerns about weakening underwriting standards.
Transparency: Limited Visibility
Private credit operates with less transparency than public markets due to lighter disclosure requirements. Investors typically receive less frequent updates and fewer standardized metrics, making thorough due diligence and reliance on skilled fund managers essential.
Market Evolution: Filling the Lending Gap
Private credit's rapid growth shows no signs of slowing down. The market is projected to reach $2.6 trillion by 2029, driven in part by banks pulling back from certain lending areas due to tighter regulations. This shift has created opportunities for private credit to step in and fill the gap.
"The popularity of private credit is a prime example of markets adapting to meet changing industry circumstances. It has become a critical and permanent solution, filling the gap that was left as the public market pulled back on lending to mid-market companies." - Tom Amster, Global Head of Financial Sponsors at Macquarie Capital
Today, private credit accounts for more than 25% of the U.S. market for below-investment-grade credit, a significant jump from just 5% in the mid-2000s.
2. ETFs (Fixed-Income)
Fixed-income ETFs have emerged as a go-to option for investors seeking exposure to bonds without the hassle of picking individual securities. These funds account for nearly 30% of ETF assets under management in Canada, reflecting a similar trend across North America. But how do they compare to private credit? While private credit offers customized, higher-yield opportunities, fixed-income ETFs focus on liquidity, simplicity, and transparency.
Liquidity: The Standout Feature of ETFs
One of the biggest advantages of fixed-income ETFs is their liquidity. Unlike private credit, where investors might have to wait months or even years to exit, ETF shares can be traded throughout the day with ease. This is particularly evident in niche markets - EUR High Yield ETFs, for example, trade with spreads about five times tighter than those of the bonds they represent.
In fact, some ETFs are traded more frequently than the underlying bonds themselves, which boosts their liquidity. However, this convenience often comes with a trade-off: lower yield potential.
Yield: The Cost of Convenience
While private credit can deliver higher returns due to its illiquidity premium, fixed-income ETFs typically offer more modest, market-aligned yields.
Accessibility: Easy to Enter, Easy to Understand
Fixed-income ETFs are accessible to a wide range of investors. Unlike private credit, which often requires large minimum investments, ETFs let you get started with the cost of a single share. Plus, they provide daily updates on holdings, fund characteristics, net asset value (NAV), and intraday pricing, ensuring a high level of transparency.
Customization: Limited but Growing Options
ETFs offer standardized exposure to bond indices or strategies. While active fixed-income ETFs aim to address this limitation through targeted security selection, they still can’t match the level of customization that private credit provides. For example, active core and core-plus ETF strategies now manage over US$88 billion in assets, while active ultrashort ETFs saw nearly US$32 billion in net inflows in 2024. Despite these advancements, they remain a one-size-fits-all solution compared to the tailored approach of private credit.
Risk Profile: A Different Set of Considerations
Fixed-income ETFs come with their own risks, such as interest rate and duration risks. However, their broad diversification helps reduce single-issuer risks. On the other hand, high-yield bonds, often traded over-the-counter, face higher transaction costs and larger denominations. ETFs, by contrast, trade at relatively low net asset values, making them more accessible.
Cost Efficiency: A Clear Advantage
ETFs are known for their cost-effectiveness. For instance, iShares bond ETFs are 77% cheaper than active mutual funds and may offer tax benefits. They also eliminate the need for the extensive due diligence typically required in private credit investments.
Why Investors Stick with ETFs
Even though private credit can offer higher yields, many investors still prefer fixed-income ETFs. The combination of liquidity, transparency, low costs, and accessibility makes them a reliable choice. During periods of market stress, trading volumes in fixed-income ETFs tend to spike, providing liquidity when it’s needed most. In essence, fixed-income ETFs serve a distinct role, offering a dependable and straightforward option within a diversified portfolio - no specialized knowledge or long-term commitment required.
Advantages and Disadvantages
Choosing between private credit and fixed-income ETFs isn’t a simple decision. Both options have unique strengths and weaknesses that can shape your investment results. Let’s dive deeper into how these two asset classes stack up against each other.
Feature | Private Credit | Fixed-Income ETFs |
Yield Potential | Higher yields (10.15% as of January 2025) with a 226bps premium over B-rated loans | Generally lower, market-aligned yields (3–6% for investment-grade bonds) |
Liquidity | Highly illiquid; difficult to exit positions quickly | Highly liquid; tradeable throughout market hours |
Minimum Investment | High barriers; historically limited to accredited investors and institutions | Low barriers; accessible with a single share purchase |
Customization | Highly customizable loan terms and structures | Standardized exposure to bond indices |
Transparency | Limited disclosure and opaque asset details | Daily updates on holdings, NAV, and pricing |
Regulation | Less regulated environment | Highly regulated with strict disclosure requirements |
Risk Level | Higher credit and illiquidity risks | Lower overall risk through diversification |
The Yield Advantage of Private Credit
One of private credit’s standout features is its high yield potential. As of January 2025, it offers an impressive 10.15% yield, which is 226 basis points higher than comparable B-rated loans in public markets. This yield is nearly double its historical average. Additionally, spreads for both sponsor-backed and non-sponsored private credit transactions can range from 115 to 280 basis points above syndicated loans. These elevated yields compensate investors for taking on illiquidity and the need for more intensive due diligence.
The Liquidity Trade-Off
Private credit’s biggest drawback? Its lack of liquidity. Investors typically have their capital tied up for months or even years. This can be a significant hurdle, especially during times of market stress when quick access to cash might be necessary. In contrast, fixed-income ETFs provide intraday liquidity, allowing investors to buy or sell shares throughout the trading day. While this flexibility is a major advantage, it often comes with the trade-off of lower yields.
Access and Transparency Challenges
Compared to ETFs, private credit has higher barriers to entry. Historically, it’s been accessible mainly to accredited investors or institutions. Transparency is another area where private credit falls short. With limited disclosures and less regulatory oversight, investors often face challenges in fully understanding the underlying assets. On the other hand, fixed-income ETFs are known for their daily transparency, offering regular updates on holdings, characteristics, and pricing. Additionally, the SEC limits illiquid investments in ETFs to 15%, providing an extra layer of investor protection.
Risk Assessment
Private credit carries greater risks than fixed-income ETFs. These include credit risks tied to individual borrowers and the inherent risk of illiquidity. The less regulated nature of private credit also means fewer investor protections compared to public markets. Fixed-income ETFs, while not without risks such as interest rate and duration exposure, benefit from broad diversification and enhanced transparency, which help investors manage these risks more effectively.
Cost and Complexity
When it comes to costs, fixed-income ETFs are known for their efficiency. For instance, iShares bond ETFs have been reported to be 77% cheaper than active mutual funds. They also eliminate the need for the extensive due diligence and ongoing monitoring that private credit investments often require. Private credit, by contrast, involves higher fees and significant operational complexity.
The Growth of Private Credit
Despite its challenges, private credit continues to gain traction as a key asset class for portfolio diversification. Over the last decade, private market assets have nearly tripled, reaching an estimated $2 trillion by the end of 2023. Looking ahead, some projections suggest that private credit could grow to $2.6 trillion by 2029. This growth reflects strong institutional confidence in its potential.
Understanding these trade-offs is crucial. While private credit offers higher yields, it demands a tolerance for illiquidity and complexity. Fixed-income ETFs, on the other hand, provide simplicity and transparency, making them a more accessible choice for many investors. Ultimately, the right choice depends on your investment goals and risk tolerance.
Key Takeaways
Private credit is reshaping the lending landscape by steering capital away from traditional banks. With yields ranging from 8–12% or even higher, it outperforms investment-grade corporate bonds and high-yield public debt. This is largely thanks to floating rates and terms tailored to meet borrowers' specific needs.
What sets private credit apart is its flexibility. It connects investors directly with borrowers and offers repayment options that traditional banks rarely provide, such as payment-in-kind (PIK) arrangements or equity-like securities.
While private credit offers higher yields and customization, ETFs remain a favorite due to their simplicity. With over $10 trillion in assets globally, ETFs provide investors with easy access to diversified strategies and the ability to trade throughout the day.
For those venturing into private credit, diversification is key. Spreading investments across 5–10 funds can help manage risks tied to individual managers. Allocating capital over several years ensures exposure across market cycles. A balanced portfolio might include a mix of non-sponsor and sponsor-owned funds, corporate lending, and asset-based financing, with conservative position sizing to reduce risk.
In 2023, private credit was valued at roughly $2 trillion and is expected to grow to $2.6 trillion by 2029. Despite this growth, it still represents only a small slice of its potential $30–40 trillion market. It commands premium yields due to faster deal closings, customized terms, and funding certainty.
Deciding between private credit and ETFs boils down to your investment goals. Private credit appeals to those willing to commit to long-term positions, offering higher yields and flexible terms. However, this approach requires patience and careful research to ensure success.
FAQs
What risks should I consider when investing in private credit instead of fixed-income ETFs?
Investing in private credit carries certain risks that set it apart from fixed-income ETFs. One major concern is default risk. Since private credit often involves lending to smaller or less-established borrowers, there's a greater chance they might miss payments. Another factor to consider is the limited liquidity of these investments. Unlike publicly traded assets, private credit can be harder to sell quickly on secondary markets, which could make it difficult to access your money when you need it most.
While the potential for higher returns can be appealing, it’s crucial to carefully evaluate these risks and determine if they align with your financial goals and comfort level with risk.
What makes private credit loans more flexible for borrowers compared to ETFs?
Private credit loans stand out by offering borrowers flexible options and tailored terms that align with their unique financial needs. These loans often come with perks like quicker approval times, customized repayment plans, and solutions crafted for specific circumstances. On the other hand, ETFs are standardized investment products that don’t allow for such individual adjustments.
Since private credit caters to the needs of both borrowers and investors, it often delivers higher returns and more individualized opportunities - advantages that ETFs, with their uniform structure, are unable to provide.
Why would an investor choose fixed-income ETFs instead of private credit, even if the yields are lower?
Investors might lean toward fixed-income ETFs instead of private credit due to the ease of trading and transparency they offer. These ETFs are highly liquid, allowing buyers and sellers to move in and out of positions with relative simplicity. Plus, their typically lower costs make them appealing for those keeping a close eye on expenses.
Another advantage lies in the diversification that ETFs bring to the table. They often include a variety of assets and can even feature actively managed strategies, which can help balance risk. For those prioritizing a straightforward and flexible way to stabilize their portfolio while maintaining quick access to funds, fixed-income ETFs present a compelling option - though they generally come with lower yield potential compared to private credit.
