Breaking: According to market sources, a major fixed-income ETF provider is challenging the prevailing narrative of an impending private credit meltdown, positioning the $1.7 trillion asset class as a core component for income-seeking portfolios.

ETF Veteran Makes Bullish Case for Private Credit

Joanna Gallegos, co-founder of BondBloxx Investment Management and the former head of global ETF strategy at J.P. Morgan, is making a contrarian call. While headlines warn of a bubble in direct lending and private debt, Gallegos argues the space represents a "sensible" and increasingly essential way for investors to generate yield. Her perspective comes as institutional allocations to private credit have swelled, but retail access remains limited and fraught with complexity.

"The fear narrative is often driven by a misunderstanding of the asset class's structure and covenants," Gallegos suggests, drawing on her decade-plus experience structuring fixed-income products. She points out that much of the private credit market is comprised of senior-secured, floating-rate loans—a profile that historically has held up better in inflationary and rising-rate environments than traditional fixed-rate corporate bonds. This isn't about speculative venture debt, she implies, but often the bread-and-butter financing for mid-sized companies.

Market Impact Analysis

The debate over private credit's health is more than academic; it's moving markets. Publicly traded Business Development Companies (BDCs), a common proxy for the sector, have seen volatile swings this year. For instance, the VanEck BDC Income ETF (BIZD) is up roughly 8% year-to-date, but that follows a 15% pullback in the latter half of 2023. This volatility reflects the tug-of-war between strong underlying yields—often between 9% and 12%—and fears of rising defaults if the economy stumbles.

Meanwhile, the traditional high-yield bond market, often seen as a competitor for yield, offers significantly lower coupons, with the ICE BofA US High Yield Index yielding around 7.8%. That spread of 200-400 basis points is what's drawing capital, but it also raises the question: are investors being adequately compensated for the illiquidity and opacity of private credit?

Key Factors at Play

  • The Liquidity Mismatch: Private credit funds typically lock up investor capital for 7-10 years, while the underlying loans may have shorter durations. This provides stability for borrowers but can be a trap for investors if they need to exit during a downturn. Gallegos's work at BondBloxx, which focuses on transparent, listed ETFs, hints at a future where more granular, liquid exposure might be possible.
  • Underwriting Discipline: The bull case hinges on the idea that private lenders, freed from quarterly public market pressures, enforce stricter covenants and maintain closer borrower relationships. Skeptics counter that fierce competition for deals has already eroded these protections, creating a "covenant-lite" wave reminiscent of pre-2008 corporate lending.
  • Economic Sensitivity: While floating rates are a hedge against inflation, they increase borrowing costs for companies. A prolonged period of high rates could strain even healthy borrowers, testing the resilience of lender portfolios. The default rate for leveraged loans has crept up from historic lows but, at around 3%, remains below long-term averages.

What This Means for Investors

From an investment standpoint, Gallegos's comments highlight a critical portfolio construction question: where does reliable income come from in a 5% Treasury world? With core bonds offering meaningful yields again, the hurdle rate for illiquid alternatives is much higher.

Short-Term Considerations

For most individual investors, direct access to top-tier private credit funds is impossible—they're reserved for pensions and endowments. The practical play is through publicly traded BDCs, closed-end funds, or newer ETF structures attempting to replicate the exposure. Investors need to scrutinize fee structures closely; layers of management and performance fees can eat 3-4% of returns annually, dramatically netting down that attractive headline yield. It's also a sector where active selection matters immensely; the dispersion between the best and worst-performing BDCs over the past five years exceeds 30%.

Long-Term Outlook

The secular trend is clear: as banks retreat from certain types of corporate lending post-Dodd-Frank, private capital has filled the void. This shift is likely permanent, embedding private credit as a fixture of the financial landscape. The long-term risk isn't necessarily the asset class disappearing, but its returns converging with public markets as it becomes more institutionalized and competitive. The golden era of 15%+ returns with low defaults may be over, but a normalized 8-10% net return could still be compelling if managed wisely.

Expert Perspectives

Market analysts are deeply divided. Some, aligned with Gallegos, see the current setup as a win-win: lenders get strong yields with protection, and borrowers get certainty of capital. "It's a borrower's market on price, but a lender's market on terms," one credit fund manager told me recently. Other strategists warn of a "blind spot." They argue that the lack of daily mark-to-market pricing masks underlying erosion in credit quality, creating a potential cliff of write-downs if a recession finally arrives. The truth likely lies in the middle—some funds will navigate the cycle beautifully, while others that chased yield will get burned.

Bottom Line

Gallegos and BondBloxx are betting that the fear around private credit is overblown, a product of sensationalism rather than fundamental analysis. For income-focused investors, the sector warrants a careful, selective look, but it shouldn't be a source of panic. The coming test won't be about headlines; it will be about cash flows. Can the thousands of mid-market companies that took on this private debt continue to service it if economic growth slows? The answer to that, fund by fund and loan by loan, will determine whether private credit proves to be the portfolio cornerstone its advocates promise or the next source of systemic stress its detractors fear. One thing's for sure: in a yield-starved world, the debate is only getting started.

Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Always conduct your own research before making investment decisions.