For example, the two largest HY bond ETFs (HYG and JNK) control about 90% of the HY bond ETF market and they trade $500M per day on average. While this level is about 10% of the underlying volume in the entire HY bond market, remember that the secondary trades are actually not impacting the underlying bond market; only the primary trades in the creation/destruction process impact the underlying market. Accordingly, in June we estimate that selling pressure only caused about 700M of net destruction of HYG during the entire month, which is slightly more than one day’s volume for both large ETFs (but significantly smaller than the volume for the underlying securities),” said Credit Suisse in the note.
The bank pointed out that when HYG did trade below its net asset value, much of the discount had to do with the fact that 90% of the ETF’s holdings do not trade everyday. Credit Suisse is not the only bank to chime in on the high-yield bond ETF liquidity issues.
Last month, Citigroup said junk bond ETFs such as HYG and JNK are “structurally sound.” Citi said these funds operated as expected during a tumultuous period, trading continuously while providing liquid exposure to the high-yield bond market. [Junk Bond ETFs Surviving And Thriving Again
“Specifically, 90% of the bonds in the HYG do not trade daily, so the HYG ETF will reflect the real time value of the underlying bonds before the actual bonds do because there is less liquidity in the cash bond market. Accordingly, the price of the ETF is a function of (1) bid/ask spread of the underlying securities in the ETF, (2) demand of the ETF on the exchange (secondary market), and (3) the level of risk carried by the external brokers,” said Credit Suisse.
ETF Trends editorial team contributed to this piece. Tom Lydon’s clients own shares of HYG and JNK.