ETFs to Play Big Role as Private Equity Arrives in 401(k)s
- President Trump is expected to order opening 401(k) plans to private equity: WSJ.
- ETFs would likely play a key role as funds like PRIV hit the market.
- Private equity assets would push ETFs further from their traditional role as broad diversifiers.
Retirement, 401(k)s and, to a large degree, ETFs have long been underpinned by bedrock notions of safety and preservation of capital—broad, diverse and somewhat predictable investing.
Private equity is none of those things. It’s about risk, leverage, massive pools of cash assembled by syndicates and payoffs that may take years to be realized if they come at all. They haven’t been the assets that plan designers consider including in accounts for building nest eggs.
Yet the high-risk world of private assets is coming face-to-face with the more-or-less stable 401(k) plan. As the Wall Street Journal and other sources have reported, President Donald Trump is expected to sign an executive order that would break another norm by bringing private-market investments to U.S. retirement plans.
ETFs, 401(k)s and Private Equity
The vehicles by which private assets will be made available to retirement plans are the exchange-traded fund and the mutual fund. ETFs traditionally haven’t been widely used in 401(k) plans due to tax considerations that make mutual funds the better choice.
This has been in the works. Deloitte wrote in April that “holdings of private capital within retirement accounts such as 401(k)s will likely be a significant portion of private capital AUM growth for the mutual fund product structure.”
The same note discussed ETFs being a preferred tool to expose 401(k)s to private assets: “Traditional investment managers are turning to structures that retail investors are already familiar with: mutual funds and ETFs.”
PRIV Sees Mixed Results
ETF investors have limited options to get exposure to private assets. The most high-profile product, the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV), which launched Feb. 27, has had mixed results so far.
The fund has been met with skeptical comments from investors as well as concerns from the Securities and Exchange Commission about the fund’s name and liquidity. Trading volume has been light, and its price is below that of its opening day.
PRIV Price Since Launch (top pane) and Trading Volume (bottom pane)—Source: FactSet
Still, its assets have nearly tripled to $139.4 million, due to $84.8 million in a few big slugs of inflows in late June and early July.
State Street Corp. (STT) and Apollo Global Management Inc. (APO) probably saw this change coming and grabbed first-mover advantage ahead of Trump's announcement. At the same time, Vanguard, Blackstone Inc. (BX) and Wellington Management are jointly pitching investments that integrate public and private markets to investors.
And remember that State Street and Apollo are teeing up a second, similar fund, the SPDR SSGA Short Duration IG Public & Private Credit ETF.
