High-yield bonds and the relevant exchange traded funds are no strangers to liquidity concerns.
The theory often bandied about is that in times of high market stress, when a slew of investors could be rushing for the same exit at the same, junk bond ETFs could subject investors to wide bid/ask spreads, significant deviations from their underlying net asset values and other unsavory circumstances.
In reality, there is an important difference between liquidity and what amounts to no more than poor trading. Sure, that seems obvious, but a real world example appeared today in the $931.5 million AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD).
HYLD, one of the largest actively managed ETFs, is off 1% in late trading on volume that is more than triple the daily average. That is not a big deal. What is noteworthy is that, according to one ETF liquidity provider, a trader moved HYLD 46 cents in a trade of 200,000 shares.
According to that liquidity provider, a 200,000-share trade in HYLD can transact within four cents, underscoring the notion that poor trading not a lack of liquidity moved the ETF 46 cents. Following that poor trade, another trade for 350,000 shares in HYLD was filled at $50.88 only to see the ETF snap back to $51.46 moments, according to the liquidity provider.
Investors’ concerns have centered on ETFs tracking less-liquid sectors of the fixed-income market, such as corporate junk bonds and muni bonds. Due to increased regulations, a consequence of the Dodd-Frank Act, banks face more scrutiny on balance sheets, leverage and capital. That has sparked increased usage of ETFs for fixed-income exposure in place of derivatives. [Institutions Increasing Use of ETFs]
Typically, when advisors and investors see light volume, the area is red-flagged to avoid it. Consequently, a broad swathe of ETF options may be needlessly overlooked by many due to misconstrued concerns. However, those concerns are not relevant to HYLD, which is generally an efficient, liquid product. [Learn About ETF Liquidity and Market Making]
AdvisorShares Peritus High Yield ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYLD.