As advisors and income investors scour the landscape for unique income opportunities, particularly those that might be able to reduce correlations to traditional assets, private credit is an increasing part of the conversation.
Fortunately, exchange traded funds such as the WisdomTree Alternative Income Fund (HYIN ) are making it easier for a broader swath of investors to access private credit. HYIN, which follows the Gapstow Liquid Alternative Credit Index, provides broad-based exposure to a variety of these assets. This confirms that it’s useful for elevated income. It also removes the burden of selecting individual securities in a space in which it’s notoriously difficult to do so.
Currently, it’s not just HYIN’s 30-day SEC yield of 10.82% that makes the ETF appealing. It’s the long-term allure of private credit. The asset class has proven surprisingly durable over lengthy time horizons. This indicates that patient investors can put the power of the asset class to work for them.
“Over a 10-year horizon, private credit indices exhibited stronger performance,” according to S&P Dow Jones Indices. “Notably, all indices declined during March 2020’s COVID-19 shock, but private credit demonstrated a stronger recovery, illustrating the divergence between private and public markets.”
Private Can Beat Public
For many advisors, the standard destinations in terms of credit exposure are investment-grade and junk-rated corporate bonds and the related funds, including ETFs. Indeed, those assets can serve income investors, but as S&P pointed out, there have been lengthy periods in which private credit has outperformed public options.
“A study by PineBridge Investments found that private credit outpaced the BSL market by approximately 157 bps on average, largely due to its illiquidity premium,” added S&P.
Past performance isn’t a promise of future returns. Still, investors considering HYIN shouldn’t overlook the asset class’s track record. Private credit often tops the corners, riskier ones at that, of the public credit market to which it’s most correlated.
HYIN's Tactical Appeal
Other benefits associated with private credit could make ETFs such as HYIN all the more appealing for tactical income investors.
“Private credit managers negotiate preferred terms in loan agreements, but these require time and extensive assessment. Many private credit loans feature floating-rate coupons priced above the secured overnight financing rate (SOFR). With potential interest rates decreases, it remains to be seen how private credit will compete with, or complement, public markets as investor demand continues,” concluded S&P.
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