A new report from market research firm Cerulli Associates predicts that advisors will eventually use ETFs to access a wider range of alternative investment products, including private credit ETFs that have yet to be approved by U.S. regulators.
Just five years ago, funds focusing on commodities and real estate made up the bulk of the alternative strategy ETF category at 37%, according to Cerulli’s “U.S. Exchange-Traded Fund Markets 2024” report. However, that universe has expanded to include derivative income, defined outcome and cryptocurrency ETFs.
Cerulli’s findings show that 30% of advisors currently report unmet demand for alternative ETF products, a higher percentage than for any other ETF category. Cerulli used a very broad definition of “alternative investment” for the report, ranging from defined outcome products such as buffer ETFs to REIT exposures.
The firm sees the greatest potential for future advisor use in ETFs that invest directly in private credit instruments, such as the one that Apollo Global Management and State Street Global Advisors submitted for approval recently. If the fund receives the green light from U.S. regulators, its strategy will include keeping 80% of net assets in investment-grade securities and 20% in high-yield bonds. No such product has yet received approval, but Cerulli researchers believe they will eventually enter the U.S. market.
Financial advisors have expressed increasing interest in allocating their clients’ money to private credit investment strategies in recent years. Private credit investments are attractive because they tend to provide current income and low volatility. They can also offer attractive yields in an era of higher interest rates. Some advisors have sought to access private credit strategies through interval funds and semi-liquid vehicles.
However, existing ETFs also invest in products like collateral loan obligations and other types of securitized debt. Just this week, for example, asset manager Nuveen launched a CLO ETF that will focus on the single A-rated segment of the market. In addition, some ETFs invest in BDCs, which offer investors access to a diversified portfolio of private credit assets. These types of ETFs, however, do not directly own private credit assets.
“It is our belief that if these types of exposures were to be made available to advisors, they would find strong interest because they simplify access to alternative investment products,” said Daniel Shapiro, director of product development at Cerulli and one of the report’s authors. “They would help a great range of alternative investment non-users start to make the initial allocation to alternative exposures through their preferred structure. The ETF structure is the preferred structure for financial advisors, the one they are most comfortable using.”
