While the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield bond ETFs, have attracted new inflows as a more liquid alternative to junk debt securities, an ETF’s true liquidity is still limited to their underlying markets. [Fixed-Income Traders Increasingly Rely on Junk Bond ETFs]
In this case, some fixed-income observers are concerned that the low liquidity in the junk debt market could cause problems in junk ETFs if a large sell-off were to occur. For instance, selling pressure in the ETF may not be perfectly reflected by the illiquid underlying market, creating widening tracking errors between the ETF’s price and net asset value.
Additionally, some are growing concerned about liquidity in bank loan funds, which hold non-investment-grade company debt, since these types of loans can take weeks to settle. In the ETF space, investors can monitor the passive index-based PowerShares Senior Loan Portfolio (NYSEArca: BKLN) and Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN). There are also two actively managed options, including the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) and First Trust Senior Loan ETF (NasdaqGM: FTSL).
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.