JPMorgan Chase & Co. has submitted a filing to the U.S. Securities and Exchange Commission (SEC) to create a new actively managed exchange-traded fund (ETF). The proposed fund, named the JPMorgan Total Credit ETF, aims to provide retail investors with exposure to the private credit market by blending it with traditional public debt.
Key Takeaways
- JPMorgan has filed plans for an actively managed fund, the JPMorgan Total Credit ETF.
- The ETF will invest in a mix of public debt and private credit assets.
- Up to 15% of the fund's portfolio will be allocated to private credit, the maximum allowed by the SEC for illiquid investments in an ETF.
- This move reflects a broader trend of asset managers seeking to offer retail access to the $1.7 trillion private credit market.
Details of the Proposed Fund
According to the regulatory filing submitted on Tuesday, JPMorgan's new ETF will invest "opportunistically" across a wide range of debt markets. The primary goals of the fund are to generate total returns and provide income for its investors. The fund will be actively managed, meaning its portfolio managers will make decisions about which assets to buy and sell rather than tracking a passive index.
A significant feature of the JPMorgan Total Credit ETF is its planned allocation to private credit. The filing specifies that up to 15% of the fund's assets can be invested in these less liquid, privately negotiated loans. This percentage represents the regulatory ceiling set by the SEC for illiquid assets held within an ETF structure.
JPMorgan Asset Management, which will oversee the fund, plans to source these private credit investments from both primary and secondary markets. A ticker symbol and management fee for the ETF were not included in the initial filing and are expected to be announced at a later date.
What Is Private Credit?
Private credit, also known as direct lending, involves loans made directly to companies by non-bank lenders. Unlike public bonds that are traded on open markets, these loans are privately negotiated. The market has grown substantially, reaching an estimated size of $1.7 trillion, as companies seek alternative financing sources outside of traditional banks and public markets.
Strategy and Market Convergence
The decision to combine public and private debt in a single vehicle reflects a strategic view on the evolution of corporate finance. Jed Laskowitz, Global Head of Private Markets and Customized Solutions at JPMorgan Asset Management, commented on this trend.
"The US corporate credit market is increasingly converging, as issuers move fluidly between public bonds and private credit. Investors are increasingly interested in investing actively across the public and private credit spectrum."
This statement highlights the blurring distinction between the two debt categories for both borrowers and lenders. By offering a single fund that spans both, JPMorgan aims to provide a comprehensive solution for investors looking to capitalize on opportunities across the entire credit landscape.
JPMorgan Asset Management is well-positioned to operate in this space, with approximately $200 billion in private securities under its management, as part of its nearly $4 trillion in total assets.
Industry Trend and Competitive Landscape
JPMorgan's filing is the latest example of a major financial institution attempting to package private assets into a retail-friendly ETF. As institutional fundraising has shown signs of slowing, managers in the private credit industry have increasingly turned their attention to the vast retail market as a new source of capital.
The 15% Illiquidity Rule
The U.S. Securities and Exchange Commission (SEC) mandates that open-end funds, including ETFs, cannot invest more than 15% of their net assets in illiquid securities. These are investments that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the price at which the fund has valued the investment. This rule is a key structural constraint for funds seeking to include assets like private credit.
However, the path to success for such products has been mixed. Other asset managers have launched similar funds with varied results.
Previous Attempts in the Market
State Street Corp. launched its SPDR SSGA IG Public & Private Credit ETF (ticker: PRIV) in late February. Despite the innovative structure, the fund has experienced what has been described as "muted demand" since its debut.
Undeterred, State Street followed up by launching the Short Duration IG Public & Private Credit ETF (ticker: PRSD) at the beginning of September, suggesting a continued belief in the hybrid model. The mixed track record for these ETFs indicates that while there is interest in private credit, attracting significant retail investment into this specific fund structure remains a challenge.
Market Timing and Potential Headwinds
The launch of JPMorgan's proposed ETF comes at a complex time for credit markets. Spreads on blue-chip public bonds are near their tightest levels since 1998, suggesting high valuations and potentially limited upside. At the same time, some analysts have raised concerns about potential stress in the private credit sector.
Warnings from institutions like Bank of America have highlighted potential risks ahead for private credit, which has expanded rapidly in a low-interest-rate environment. The performance of these less-transparent assets in a period of higher rates and potential economic slowing is yet to be fully tested.
JPMorgan's move to launch an actively managed fund could be a strategic response to these conditions, allowing its managers to navigate both public and private markets to identify value and manage risk. Investors will be watching closely to see if this new offering can successfully bridge the gap between the private credit world and the accessible, liquid structure of an ETF.
