A high-yielding play is getting its moment in the sun as investors look to beef up their ability to generate income and aim to minimize volatility. Enter the interval fund , a structure that holds private credit and other income-generating assets that are less liquid than what’s found in an exchange-traded fund. Because of the nature of their holdings, these funds can’t be sold at will — instead, they have windows of liquidity through share repurchases typically offered once a quarter. The funds can also use leverage to help boost their income, resulting in yields that are in the 9% to 11% range, according to Brian Moriarty, principal, fixed income strategies at Morningstar. “More recently, people realized these are potentially a perfect vehicle to offer private credit and other private assets to retail investors – regular investors who otherwise don’t get access because if you want to buy into a private credit fund, you have to be an accredited investor,” he said. Accredited investors need to have a net worth over $1 million, excluding their private residence, and income over $200,000 (individually) or $300,000 (with a spouse or partner) in each of the past two years. Asset managers have been taking steps to democratize investing in private credit lately, with State Street and Apollo Global Management recently launching the SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV) . On the interval fund front, Capital Group and KKR have teamed up on two prospective interval funds , having recently filed with the U.S. Securities and Exchange Commission to offer them. An illiquidity premium The difference between offering regular liquidity via an ETF versus quarterly liquidity in an interval fund can result in a premium for investors who are willing to stay put. “We think about private credit and private markets as a way to generate additional income, a premium to what you can get in the public market,” said Matthew Bass, head of private alternatives at AllianceBernstein. The firm offers the AB CarVal Credit Opportunities Fund (ABAYX) , an interval fund that invests in different private credit opportunities, ranging from specialty finance to aviation leasing. ABAYX is a new offering, launched in February 2024 and paying a distribution yield of 7.29%, but it also has an adjusted net expense ratio of 1.98%, according to the fund’s website. Financial advisors have also been interested in private credit exposure, according to Peter Blue, head of alternative solutions with Franklin Templeton Investment Solutions. “Advisors are seeking interval funds as an operationally easier way to access less-liquid markets,” he said. The firm offers the Franklin BSP Private Credit Fund (FBPAX) , which debuted in 2022. The fund has a distribution rate of 7.89% and a net expense ratio of 4.78%. Financial advisors who have dipped a toe into the space said that interval funds can be an effective tool for income-focused clients who bring a long-term mindset to their portfolio and have ample assets elsewhere for liquidity needs. “I think of it as a couple years’ commitment to the fund,” said Thomas Balcom, certified financial planner and founder of 1650 Wealth Management in Lighthouse Point, Florida. “Most people say they’re long-term investors and that’s fine, but there is always a case where the client might need money: death, divorce, the loss of a job,” he said. “You want to make sure they’re aware of the lock up.” Be sure to kick the tires As more interval funds hit the scene, investors will need to perform some due diligence before they hop in. “If you have, for example, a 1% to 5% allocation to an interval fund, are you going to need that in the next three months?” said Ben Loughery, CFP at Lock Wealth Management in Atlanta. “I would imagine your financial advisor has the other 95% of your portfolio or other parts of your portfolio earmarked for immediate cash needs.” The fees can also be on the hefty side versus mutual funds and ETFs. A 2024 study co-authored by Morningstar’s Moriarty found that the average prospectus adjusted expense ratio across all interval fund share classes is 2.49%. That compares to 0.58% for ETFs and 0.99% for mutual funds. “The math works the same there as it does elsewhere: If there are higher fees, it’s more likely … the total return will be lower,” Moriarty said. He also recommended investors dig through the marketing materials and understand what they’re buying into – and know why they’re buying it. “You can’t make that investment on a whim; you’re stuck with it for at least a quarter,” Moriarty added.
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