Are ETFs That Hold a Little Bit of Private Assets a Big Deal?

One doesn’t need a boatload of cash or a “Members Only” jacket to get into private equity; an ETF will do the job … sort of.

Private fund assets have roughly tripled over the past 10 years, outpacing the over 2X growth rate of the public market, a recent report by Morningstar found. As companies stay private for longer and reach incredible valuations, there has been plenty of interest in how fund managers can give their customers a taste. There has been a steady buildout of interval funds, and other semi-liquid products, and the trend has even bled into the highly liquid category of exchange-traded funds. 

“The ETF space is obviously more limited, because you don’t have the same structural protections to own private assets as some of those other wrappers,” said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar. “You can offer exposure to private assets — it just can’t be a really substantial portion of the portfolio.”

Conditions May Vary

On that point, the small number of ETFs in the category have offered relatively small allocations to private markets, a consequence of the SEC’s 15% limit on illiquid holdings. Still, for retail investors who couldn’t otherwise access private credit or private equity, that may be enough. State Street Investment Management has sought to tap into that demand, last year adding two private credit funds: the SPDR SSGA IG Public & Private Credit ETF (PRIV) and the State Street Short Duration IG Public & Private Credit ETF (PRSD). Those products have about 20% exposure to private credit, getting around the 15% limit by having Apollo provide liquidity. Both outperformed their benchmarks last year, and they should be considered core bond holdings rather than just private-credit vehicles, the company has said. 

Private equity is probably a more alluring category for retail investors than private credit, Armour said. But there are few ETFs with private equity holdings, and there are some important considerations for investors thinking about those, he noted. 

For example:

• The $1.6 billion ERShares Private-Public Crossover ETF (XOVR), has 10% of its assets in SpaceX, through a special-purpose vehicle. That fund received a lot of attention (and flows) last year, as it is perhaps the only US ETF with SpaceX exposure. But it’s unclear how ERShares values the SpaceX holdings, and special-purpose vehicles can have high fees that don’t necessarily need to be disclosed to ETF investors, Armour noted. ERShares did not respond to a request for comment.
• The $90 million Baron First Principles ETF (RONB) is different, in that it holds Elon Musk’s xAI directly, Armour said. However, the issue of private-equity valuation remains. That ETF has less than 6% of its assets ($5 million) in xAI, according to the firm.
• Asset managers have recognized that both private markets and ETFs can require investor education, and they’ve been rapidly hiring product and portfolio specialists as they build out in those areas, according to a report last week from Cerulli Associates.

Not That Fancy: “When people talk about private equity, they think it’s like Steve Jobs in his garage with Apple, but in many cases these are huge, late-stage companies,” Armour said, with the examples of xAI, Anthropic and SpaceX being the size of top 40 US public companies. “You’re not like a venture capitalist, buying private equity in an ETF.”