The current "tariff tantrum" may help answer a hot investment strategy question.
Is it safer for a U.S. retirement saver to invest in an S&P 500 index fund, or to put at least some of the nest egg in private equity funds, private credit funds and other private assets?
President Donald Trump gave private assets a stability test last week, when he announced a big new wave of tariffs, or import taxes. The import taxes could increase the prices of everything from fish to automobiles, and they triggered a massive wave of stock selling, demands for those who invested borrowed money to post more collateral, and efforts by nervous asset managers to hedge against market risk.
One early, incomplete answer is that the private assets could add diversification but might end up having comparable performance over time.
The price of one exchange-traded fund known for investing in private credit, the VanEck BDC Income ETF, lost 11.7% of its value during the seven-day period ending Monday, and another, the Virtus Private Credit ETF, lost 8.8% of its value.
That compares with a 9.1% loss for the S&P 500.
Those two funds and a group that includes five other ETFs and asset managers known for private asset programs — Apollo, Blackstone, the Carlyle Group, KKR and Invesco's Global Listed Private Equity fund — had a five-year average price increase of 146.7%. That compared with an average increase of just 103.9% for the S&P 500.
But, over the past 12 months, the S&P performed much better, with an average decrease of just 1.4%, compared with an average decrease of 9.3% for the companies and ETFs with private-asset ties.
What it means: How well private assets perform in a down market could take more time and a lot of math to determine.
The backdrop: Private equity firms focus on investing in companies that are not publicly traded, and private credit firms serve as alternatives to banks and publicly traded bonds.
Private markets now manage about $13 trillion in assets, up from $1.6 trillion in 2005, according to Deloitte and the Carne Atlas report.
Marc Rowan's view: Marc Rowan, the CEO of Apollo, has argued that finding ways to let U.S. retirement savers put some of their 401(k) plan and IRA money into private assets could add much-needed diversification.
Rowan said in November 2023, during an Apollo earnings call, that the S&P 500 stocks then generated about 80% of U.S. stock trading volume.
"Ten stocks make up nearly 35% of the S&P 500," Rowan said.
At that point, the "Magnificent Seven" stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — accounted for about 30% of the value of the S&P 500 stocks.
"We have literally never had so much concentration in so few instruments since the Nifty 50," Rowan said, referring to a collection of big "blue chip" stocks that captivated retail investors in the 1960s and 1970s.
Rowan suggested that encouraging retirement savers to put their nest eggs in target-date funds that got so much of their value from seven stocks made little sense.
The tariff tantrum test: Torsten Sløk, Apollo's chief economist, wrote in a commentary Monday that the Magnificent Seven companies could be especially vulnerable to tariffs, because 50% of their earnings come from outside the United States. The average share of non-U.S. earnings for all S&P 500 companies is 41%.
"As a result, the Magnificent 7 will be hit harder on their global earnings than other S&P 500 companies," Sløk predicted. "Their earnings could be even more negatively impacted if Europe retaliates in the form of a digital services tax."
Credit: peshkov/Adobe Stock
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