High-yield, speculative-grade debt traders traditionally tapped into fixed-income assets over the phone, but with the advent of exchange traded funds, more are turning to the investment vehicle as their go-to source for junk bond exposure.
Assets in the top 10 junk bond ETFs have expanded 24% since May 2012, reports Lisa Abramowicz for Bloomberg.
“The ETFs allow me to go into markets that are harder to get into,” Bill Larkin, a fixed-income money manager at Cabot Money Management Inc., said in the article. “I’m trying to manage risk using ETFs.”
Consequently, ETFs are exerting greater influence on trades when new corporate bond sales slow. For instance, George Bory, head of credit strategy at Wells Fargo, pointed out that over 75% of the 200 most actively traded bonds in February were among ETFs’ holdings, notably the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG). [Credit ETFs See Stout Inflows]
ETF bond holdings “are often first movers when the high-yield market pulls back or rallies,” Wells Fargo analysts said in a recent report.
However, Stephen Laipply, a BlackRock product strategist who focuses on fixed-income ETFs, argues that the ETFs, due to their transparent nature, only sheds light on price swings in more frequently traded securities.
Nevertheless, most fixed-income investors are turning to ETFs because the investment vehicle provides easier and quicker access to the relatively illiquid bonds market, according to Greenwich Associates. Volume in the broader high-yield bond market has increased 69% since 2008, whereas junk bond ETFs have seen trading volumes surge 800%.