Private Credit in ETFs: Why DoubleLine Says It Absolutely Won't Work

efine the private credit has long been a high-growth but illiquid asset class. Attempts to bring it into exchange-traded formats have faced skepticism. DoubleLine Capital, a prominent fixed-income manager, has stated that private credit does not work within ETFs. The firm argues that the structural and liquidity risks are incompatible with the demand for immediate redemptions.

The recent market environment has highlighted the limitations of private credit. Redemption pressures across the sector have forced managers to restrict redemptions to avoid forced asset sales. This mechanism, while protective for portfolios, raises concerns for investors accustomed to ETF-like liquidity.

Investors are now reevaluating the risks they are taking in their multi-asset portfolios. Pimco's Lotfi Karoui noted that the private credit strains serve as a wake-up call. Investors are being prompted to think more carefully about where they deploy capital and whether they are being adequately compensated for illiquidity.

Why Is Private Credit Failing in ETF Structures?

Private credit relies on long-dated, non-traded loans, often funded by investor capital that expects periodic redemptions. This model creates a mismatch between the asset's liquidity and the liabilities of the fund. ETFs, by contrast, operate under the expectation of daily liquidity for investors.

When redemption pressures accelerate, private credit managers must either restrict redemptions or sell assets at a discount. This process can trigger a contagion effect as investors sell other, unrelated assets to raise cash. Such a dynamic spreads volatility beyond the private credit market itself.

How Are Investors Responding to the Strains?

Investors are shifting away from overexposure to illiquid assets, particularly in software sectors vulnerable to AI disruptions. Tighter monetary policy has also exposed weaknesses in loan underwriting. As a result, capital is flowing toward asset-backed finance and infrastructure loans with more predictable cash flows.

JPMorgan Chase & Co. and other banks have responded by restricting lending to private credit funds. This trend indicates a broader reassessment of risk exposure. The interconnectivity between banks and private credit managers has become a growing concern, with undrawn commitments to non-depository institutions totaling $1.9 trillion.

What Alternative Opportunities Are Emerging?

Asset-backed finance is gaining traction as investors seek more stable, collateral-backed income. This includes areas such as equipment financing and AI-related infrastructure. These lending opportunities offer more predictable cash flows that are less tied to business cycles.

Meanwhile, ETFs themselves are evolving. Dimensional Fund Advisors recently launched its first ETF share class for the DFA US Micro Cap ETF, allowing in-kind redemptions to purge capital gains and improve tax efficiency. This structure benefits all investors in the fund, whether they own ETF or mutual fund shares according to Morningstar.

The private credit sector is unlikely to disappear but is expected to undergo a deep rethinking of risk and return. Investors will demand clearer compensation for illiquidity and a more robust alignment between assets and liabilities. This recalibration could reshape the landscape of alternative credit for years to come.