Animal Spirits Podcast: "Talk Your Book: Investing in Private Credit ETFs and All-Time Highs"

Date: September 15, 2025
Hosts: Michael Batnick and Ben Carlson
Guests: Wes Krill (Dimensional Fund Advisors), Tony Kelly (BondBloX)

Overview

This episode offers a two-part "Talk Your Book" special:

1. A deep-dive with Wes Krill of Dimensional Fund Advisors, exploring market highs, investor behavior, and small cap performance.
2. An interview with Tony Kelly, co-founder of BondBloX, unpacking the world of private credit, CLOs, and how everyday investors can now access this traditionally institutional asset class through ETFs.

Part 1: Investing at All-Time Highs, Small Caps, and Market Structure

Guest: Wes Krill (Dimensional Fund Advisors)

Key Discussion Points & Insights

The Reality of All-Time Highs ([02:00]–[03:25])

• All-time highs are often viewed with concern, but Krill highlights that they are statistical evidence of long-term positive market returns.
  • Quote: “We shouldn’t be too surprised when they go up in the following week. And sure enough, we find the average return following these new market highs was almost identical to just the unconditional average across all weeks.” — Wes Krill [03:13]

Price-Insensitive Buyers & Active vs. Passive Flows ([03:26]–[05:30])

• The increasing flows into index funds and ETFs have led to more "price-insensitive buyers." However, active management and high daily trade volumes maintain market efficiency.
  • Quote: “We do believe that there’s still ample amounts of price discovery happening.” — Wes Krill [05:25]

Small Cap Performance & Value Premium ([05:31]–[08:59])

• Recent underperformance of U.S. small caps is more about mega-cap outperformance than a lost small-cap premium.
• IPOs are often wrongly blamed for small-cap challenges; in reality, IPOs typically underperform in their first year, and the relationship with small-cap returns is negligible.
  • Quote: “If you look at the performance of IPOs, they tend to do worse than the market on average over the first year, not better.” — Wes Krill [09:12]

Fund Flows and Contrarian Indicators ([09:30]–[10:30])

• Outflows from small cap ETFs have reached historical extremes—potential contrarian opportunity.
  • Quote: “Investors...are just throwing up small caps. They want nothing to do with it. Which, if you are of any contrarian inclination, should feel good about that.” — Ben Carlson [09:30]

Diversification Benefits ([10:30]–[11:25])

• Small caps and value stocks remain essential for diversification, especially as mega-caps dominate index weightings.

Valuation Spreads Now vs. Dot-com Era ([11:25]–[13:10])

• The valuation gap between large growth and small value is as extreme now as in the dot-com bubble, but this doesn’t reliably predict future returns.
  • Quote: “Valuation spreads really have not been strong predictors of what subsequent returns are going to be.” — Wes Krill [12:30]

Costs of Indexing: Hidden Friction ([13:15]–[15:23])

• Index funds can incur hidden costs during reconstitution events (e.g., the Russell index), as knowledge of upcoming changes allows others to “front run,” raising execution costs for index funds.
  • Quote: “These are costs that don't show up in the expense ratio. They're actually in the indices themselves.” — Wes Krill [15:10]

Market as a Casino: Behavioral Challenges ([15:23]–[17:25])

• Comparing markets to casinos, Krill explains that markets are “equilibrium” systems, where outperformance is difficult unless you have unique information—much like sports betting.
  • Quote: “A good company is going to be priced based on success in the future, which means it might have a high price, which means it might not be a high expected return company. That's why it's so challenging to just pick a company and try and do better than the market.” — Wes Krill [17:09]

Notable Quotes & Moments

• Dispelling the Fear of Highs:
  “It's happened about one out of six weeks in the US market historically. That's good news for investors.” — Wes Krill [02:50]

• On Active vs. Passive:
  “Even the stuff that some people would consider passive...likely a lot of people who are trading in and out of these ETFs are not doing so to establish long-term buy and hold positions.” — Wes Krill [04:50]

• On Small Cap Contrarianism:
  “If you are of any contrarian inclination, should feel good about that.” — Ben Carlson [09:30]

Important Segment Timestamps

• [02:00] – All-time highs and market expectations
• [04:12] – Active vs. passive manager roles
• [05:31] – Small caps vs. large cap dominance
• [09:30] – Small cap outflows: contrarian signal
• [13:47] – Hidden costs in index investing
• [15:41] – “Casino” analogies for investing behavior

Part 2: Inside Private Credit and CLO ETFs

Guest: Tony Kelly (BondBloX)

Key Discussion Points & Insights

What Are CLOs? ([20:00]–[22:00])

• CLOs (Collateralized Loan Obligations) are asset-backed securities similar to mortgage-backed securities, except the underlying assets are corporate loans—often to private companies.
• PCMM allows everyday investors to access this market via a tradable ETF.
  • Quote: “A CLO is an asset-backed security...that owns loans. The majority of the CLO market is what we call BSL or broadly syndicated loans.” — Tony Kelly [20:20]

Why Higher Yields? The Complexity and Illiquidity Premium ([22:10]–[22:57])

• Investors are compensated for the complexity and illiquidity of the underlying loans with higher yields.
  • Quote: “Sometimes you can think about it as maybe even a complexity premium.” — Tony Kelly [22:20]

Liquidity and the ETF Wrapper ([22:57]–[24:20])

• Securitization, through the CLO structure, turns an illiquid pool of loans into a tradable security. This process bridges the liquidity gap for daily-traded ETFs.
  • Quote: “The securitization, putting them in that wrapper, creates a lot of liquidity.” — Tony Kelly [24:20]

Interest Rate Risk: Floating Rate Advantage ([24:26]–[25:21])

• CLOs mostly offer floating rates: they’re insulated from rising interest rates, though they don’t benefit when rates fall.

Underlying Diversification ([27:45]–[28:10])

• PCMM invests across approximately 60+ CLOs, each with about 100 loans, totaling exposure to about 6,000 companies.
  • Quote: “You can just do the math...that’s 6,000 different companies that are represented in PCMM.” — Tony Kelly [27:50]

Yield Advantage Over Other Bonds ([28:20]–[29:26])

• PCMM (A-rated on average) offers coupons around 8%, significantly higher than investment grade (~4.8%) and even high-yield corporate bonds.
  • Quote: “The yield pickup is about 300 basis points on investment grade. Even at 8%, when you compare that even to high yield corporate bonds, it’s out yielding high yield and it’s significantly higher rated.” — Tony Kelly [29:20]

Industry and Manager Diversification ([29:44]–[31:19])

• Exposure isn’t just to many companies, but also many industries and managers (Blackstone, KKR, Golub, etc.), further reducing risk.

How CLOs Weather Downturns ([32:12]–[33:34])

• CLOs withstood the 2008 and 2020 credit events relatively well, with default rates lower than the underlying loan market, thanks to robust underwriting and seniority in capital stacks.

Price Stability and Volatility ([33:34]–[35:37])

• Absent a credit event, CLO ETF prices are relatively steady: floating rates mute interest-rate risk, and with broad diversification, day-to-day price volatility is low.

Investment Process: Fundamental vs. Quantitative ([35:37]–[36:39])

• Manager selection and portfolio construction mix fundamental credit analysis with quantitative portfolio risk targets.

Who Is Investing? ([39:16]–[40:39])

• Early inflows are split between financial advisors serving high-net-worth clients (who can’t always access private credit) and institutions using the ETF for liquidity sleeves in private credit allocations.

Rise of Private Credit as a Market Force ([40:53]–[41:49])

• U.S. private credit is a $30 trillion market—now larger than the corporate bond market—driven by regulatory changes and the increasing tendency of companies to stay private longer.
  • Quote: “It's a $30 trillion asset class which makes it actually bigger than the corporate bond market here in the US.” — Tony Kelly [40:54]

Risks: Covenant-Light Lending & Recessions ([41:59]–[44:23])

• With so much money flowing into private credit, loan terms have loosened (“covenant light”), but the seniority and diversification characteristics of CLOs are a mitigating factor.
• The key to weathering recessions is diversification across loans and managers.

Notable Quotes & Memorable Moments

• Educating on CLOs:
  “They may not be as widely known as other asset classes...They've been around 25 plus years.” — Tony Kelly [19:16]
• On Yield and Risk:
  “Within the private credit space, there is a complexity to ultimately navigate the market, access the market, and investors are benefiting from that as they're investing.” — Tony Kelly [22:20]
• On Private Credit Growth:
  “Regulation like the JOBS act has made it easier for these companies to raise capital and easier for the managers in this private credit space...to pool assets and invest in this way, which doesn’t necessitate going to the public markets anymore.” — Tony Kelly [41:10]
• On CLO Structure in Downturns:
  “They’re senior secured loans. So they're the first to get paid. So these are the safest loans in the cap table. So they're the last to be defaulted.” — Tony Kelly [42:40]

Important Segment Timestamps

• [19:16] – What are CLOs?
• [22:10] – Why do CLOs pay higher yields?
• [24:26] – Floating rate and impact of rates
• [27:45] – How diversified is PCMM?
• [28:20] – Yield comparison to corporate/high yield bonds
• [32:12] – CLOs and historical credit events
• [40:53] – Size and evolution of the private credit market
• [41:59] – Addressing “covenant light” and risk concerns
• [43:30] – CLOs in a recession scenario

Summary / Takeaways

• Market Highs: Hitting all-time highs isn’t a bearish signal; it’s a natural feature of markets with positive expected returns.
• Small Caps & Diversification: Despite recent outflows and performance issues, small caps provide valuable diversification—U.S. underperformance is largely a story of mega cap dominance.
• Hidden Indexing Costs: Passive investors face embedded trading friction from well-telegraphed index changes.
• Private Credit & CLO ETFs:
  • CLOs provide high, floating-rate coupons and robust diversification (across thousands of loans/managers/industries).
  • ETFs like PCMM offer access to this asset class in a liquid wrapper, previously only available to institutions.
  • While not without risks (credit events, loosening lending terms), manager selection, credit seniority, and industry diversification help mitigate exposures.
• The Macro View: Private credit is growing rapidly, reshaping traditional credit markets and giving investors new tools and opportunities.

Resources

• Dimensional Fund Advisors: dimensional.com
• BondBloX & PCMM ETF: bondblocksetf.com
• Email Animal Spirits Podcast: animalspirits@compoundnews.com