Ladies and gentlemen, State Street may have just done it again.

The leading asset manager filed to launch a second exchange-traded fund that would give investors exposure to both private and public investments in a single vehicle — something that had never been done until just a few months ago. The SPDR SSGA Short Duration IG Public & Private Credit ETF is expected to allocate at least 80% of the fund’s net assets in a portfolio of investment-grade debt securities, and typically anywhere from 10% to 35% in private credit, according to a filing on Friday. It will mark the second such fund from the powerhouse partnership between State Street and Apollo Global as a laundry list of firms try to open up private credit to Main Street investors.

“An ETF with a short-duration profile makes sense,” said Jason Kephart, a senior principal at Morningstar. “It’s easy to slice-and-dice based on maturities.”

Life’s Too Short

States Street’s Short Duration IG Public & Private Credit ETF will invest in a “wide range” of private credit, like instruments that are directly originated, issued in private offerings or to private companies, and even by non-bank lenders, according to the release. What stands out about the filing — and differentiates it from the company’s first public-private ETF launch PRIV in February — is the duration. Bond products, and credit, generally have short, intermediate and long-term varieties that give investors time-period options to lock up their money.

Short-duration products, in particular, are attractive to investors dealing with less stable businesses, Kephart said. “Investors that want to lend to riskier companies can get their money back faster — and that probably does have some appeal to people,” he said. While details are still emerging, the filing revealed:

• The product may invest up to 20% of its net assets in high-yield securities, known as “junk” bonds, according to the filing.
• The ETF may also use derivative instruments, like futures contracts, swaps, and options, to hedge currency exposure and manage yield. Fees and a ticker for the fund were not disclosed.

“For regulatory reasons, we cannot discuss funds that are pending SEC review,” said a State Street spokesperson. “We are in a quiet period.”

What Gives? State Street’s PRIV, the OG of public-private ETFs, launched in late February, but has pulled in just $55 million in assets since, leaving some experts to worry about investor demand for the new products. Just $5 million in assets flowed into the fund in the first two weeks, and new investments have now almost completely dried up. “Are financial advisors as excited about getting private assets into client portfolios as asset managers are about selling them?” Kephart said. “We don’t really know as of yet.”

Some advisors have voiced concern that private asset managers may be looking to offload junk assets. They’re also worried about liquidity, and if the interests of asset managers selling the products are actually aligned with those of their clients. “It’s a way to stand out,” Kephart said. “If it’s in the best interest of investors, it’s fair to say … maybe.”

Who wants some beta?

Vanguard rounded out its municipal bond fund suite last week with a pair of passively managed tax-exempt funds: the Long-Term Tax-Exempt Bond and New York Tax-Exempt Bond ETFs. The strategies are new, not replicating existing mutual funds from the company’s extensive product line. There are, however, two active mutual funds in the same category, the Admiral shares of which charge 9 basis points — the same fee charged by the passive ETFs. But there is still a draw for index-level returns, or beta.

“Some clients just want the beta,” along with the low cost and ease of operation with an ETF, said Perryne Desai, senior fixed income product manager for the two new funds. “Now that bonds are actually yielding something and they are a safe harbor … there is no better time to be in fixed income. There’s no better time to be in munis.”

The Long and Winding Road

Vanguard has been building out its muni bond ETF line for two years, Jeff DeMaso, editor of The Independent Vanguard Adviser, said in a statement about the launch. With the additions, Vanguard has two dozen muni mutual funds and ETFs. The two new products “won’t turn heads but are practical additions to Vanguard’s roster,” DeMaso said. And they don’t necessarily offer a cost advantage over two existing active mutual funds, unless one takes into account the $50,000 minimum needed for Vanguard’s Admiral shares — the Investor shares, which have a $3,000 minimum, charge 17 basis points for the Long-Term and 14 for the New York version. “If you are willing to own a mutual fund (over an ETF), you can get Vanguard’s active management for free,” DeMaso said. “That’s a good deal in my book.”

Some of the details about the active funds:

• The Long-Term Tax-Exempt Fund, at $16.9 billion, has trailing returns of 0.26% over a year, 2.9% over three years, and 0.76% over five years, data from Morningstar show.
• The New York Long-Term Tax-Exempt Fund, at $5.1 billion, returned 0.28% over a year, 3.04% over three years, and 0.73% over five.

Better for the Beta: The new ETFs are managed by Vanguard’s fixed income group, whose track record in active management benefits the index team, Desai said, citing the example of the nearly 10-year-old Tax-Exempt Bond ETF, which has a beta of 0.97, according to Morningstar. “Our tracking error is pretty darn tight, and in municipals, that’s difficult to accomplish.”

American Century is losing its head of ETF solutions, Rene Casis, who joined the firm just before it launched its first exchange-traded fund in 2018.

In regulatory filings late last week, the company disclosed that Casis will soon no longer be a portfolio manager on 11 ETFs. An American Century spokesperson confirmed in an email that Casis will leave the company in about three weeks to “pursue another opportunity” and that a search is underway for a successor. “His last day managing portfolios is June 11,” the spokesperson said. “He remains with the firm until June 20 to assist as needed.”

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