While corporate bond exchange traded funds only make up a sliver of the $9.2 trillion U.S. corporate bond market, investors are more interested in using the fund investment vehicle to gain exposure to fixed-income assets.
According to Fitch Ratings, dealer inventories in investment-grade corporate bonds hovers around $9 billion as of the end of June. Meanwhile, the five largest investment-grade corporate bond ETFs have a combined $45 billion in assets.
High-yield bonds paint a similar picture, with related ETF assets around $28 billion, or four times the $7 billion in dealer inventories.
Fitch analysts, though, note that interest in Treasury and muniicpal bond ETFs remain less prominent. Treasury ETF assets have held steady at over $60 billion over the past few years, or 0.5% of the $11.3 trillion U.S. Treasury market. Muni ETFs have $13 billion at the end of March, or 0.35% the $3.7 trillion muni securities market.
Moreover, Fitch points out that investors are turning to the ETF vehicle to quickly enter and exit fixed-income positions during periods of market volatility, particularly in high-yield bonds. The average trading volume on a weekly basis in the five largest high-yield corporate bond ETFs have tripled from $470 million in May to over $1.5 billion in June.
“This ramp-up in trading activity points to the utility of ETFs in allowing investors to rapidly enter and exit fixed income positions during a period of market turbulence,” Fitch analysts said. “However, increased ETF trading volumes might also amplify overall bond market volatility, as redemptions of ETFs can, in turn, drive selling in the underlying bonds.”