High-yield bond ETFs have exploded in popularity in recent years with investors desperately seeking to boost income. As assets invested in the sector continue to grow at a rapid pace, ETFs face charges they are contributing to volatility in the high-yield debt market.
“Aside from headline risk, the momentum swings in high-yield retail fund flows is another risk institutional investors face. Over the last few years, mutual funds and ETFs have grown from 15% to an estimated 25% of the high-yield market. This represents the highest level on record,” according to a recent paper from Guggenheim Partners.
“High-yield ETFs, a relatively new product, have grown from $50 million to almost $30 billion over the past five years. The recent upward trend in volatility, currently near post-2008 recession highs, can be partly attributed to the increased significance of high-yield mutual funds and ETFs,” Guggenheim added.
Still, ETFs have provided a low-cost and liquid vehicle for individuals to invest in high-yield bonds. The funds can, however, trade at a premium or discount to net asset value when the market is moving fast. [Look Before You Leap Into High-Yield Bond ETFs]
Although ETFs that invest in high-yield bonds have grown in assets along with volatility, it’s not clear if ETFs are the primary cause of the wider price swings.