From America’s largest bank to the largest asset manager, Wall Street investment strategies, once booked for private banking clients, are increasingly being offered to Main Street investors.
Amidst the market revisions and continued uncertainty regarding US stocks and global economic outlook, JPMorgan Chase and BlackRock are one of the key players in the ETF space. This includes private credit as a mainstream bond portfolio holding, as well as stock revenue strategies that involve more complex transactions than traditional dividend funds.
“Across our business, we are looking at the incredible demand from ETF investors looking for access to alternative investment funds. Managers aim to push that wealth space further, spur growth to meet investors, and meet the Managing Director and Global Head of the BNY Mellon ETF Business.
“While mutual funds still make a lot of sense in their retirement accounts, interval funds are really successful in allowing access to individuals’ credit,” Jay Jacobs, head of US themes and active ETF business at BlackRock, told the conference’s Pisani. He was referring to the long-standing form of funds that have existed. There, investors can access private credit despite having lower liquidity than ETFs.
BlackRock, the world’s largest asset manager and the largest publisher of ETFs, acquired a provider of alternative investment research last year, said Preqin and Jacobs that the company is planning to “index more private investments.”
The SEC recently approved its first private credit ETF, but it is not without some controversy.
The lack of liquidity in the private market is a key issue that ETFs will resolve as they seek to grow alternative investor sides of their businesses. These types of funds, like Van Eck’s BDC Income ETF, invests in business development companies that provide private loans to small and medium-sized businesses, traditionally illiquid, but more people are accessing it due to innovation in the ETF industry.
Another trend we are reaching within the ETF market amid current inventory volatility is active ETFs designed to provide negative side protection while leveraging the revenues generated from selling call options. ETFs, including the JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), use this approach.
Brion Lake of Goldman Sachs Asset Management said in his recent “ETF Edge.” He was one of the leaders of the JPMorgan ETF business when JEPI was created and now implemented a similar strategy at Goldman.
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Funds like JEPI are exposed to sell call strategies to investors.
“There are multiple ways to win with such strategies: you can be invested in the stock side and earn profits, earning premium income that will increase your need to grow across all asset classes and your desire for income.
The JPMorgan Equity Premium Income ETF has an expense ratio of 0.35% with a dividend of 7.2%. The company also offers the same expense ratio for the JPMorgan Nasdaq Equity Premium Income ETF, but currently has a dividend yield of 10.6%. “It’s an effective trade-off in a choppy market,” Spence said.
Thirty years ago, investors would have had to be high-end clients at Wall Street Private Bank, customizing their portfolios to participate in options fund strategies, said Ben Johnson, head of client solutions and asset management at Morningstar. But now, “ETFs make these strategies easier and cheaper to implement,” he said.
Buffer ETFs run by Goldman and others have been increasingly popular, although they have been suppressing both market rise and downsides as a way to mitigate volatility with returns.
“Obviously, looking at the flow, there’s a demand for these products,” Slavin said. “Until recently, that wasn’t well known,” he added.
Premium income and buffered ETFs can provide investors with a way to stay in the market rather than run. However, in a market that saw the recent sudden decline, Jacobs says these strategies provide a way for investors to enter the market for fear of losing money soon. That’s a key point, he said, with trillions of dollars sitting in financial market accounts. “Many investors use buffer products to get out of cash and get out of the market,” he said. “I just saw no one hold cash for five years and put money in the market and sell 10%.”
After seeing the S&P 500 already lose more than 10% of its value in three weeks this month, the ETF strategy designed to provide protection has attracted more attention from advisors and their clients. But Johnson says investors should remember that there’s nothing “new” about these investment strategies that have been used on Wall Street for decades, and investors should weigh both the pros and cons of wrapping them in an ETF structure.
Private credit ETFs are liquid trading formats, as interval funds trading under the ticker symbol are already available. ETFs have the structural advantages they offer. This is an inexpensive way to access “very expensive, ultra-fine investments” for a long time, he said. But on the other side, in order to be approved by the SEC, the ETF “needs to soak much of what investors want in the water,” he added.
Nevertheless, Johnson believes it may be just a matter of time before private credit ETFs become the norm. “I think I’ll go back to the bank loans around 2011,” he said. Many people said, “I was balancing it with an ETF.
