As the corporate-debt market becomes increasingly illiquid, institutional investors have piled into fund options, contributing to a rapid growth spurt in bond-related exchange traded funds.
Bond ETFs have attracted $32 billion in new inflows globally this year through February 26, the strongest start to any year since 2002, reports Katy Burne for the Wall Street Journal. [Bond ETFs Extend Record Inflows]
Additionally, over half the $20 billion that flowed into BlackRock’s iShares fixed-income ETFs in the first eight weeks came from institutions like insurers and endowments. The provider also points out that institutional money in some large ETFs has more than doubled in the past few years.
TABB Group calculates that corporate bond ETFs have witnessed assets under management expand over $90 billion from 2009 to 2014, a nine-fold jump in aggregate and an annual 42% compound growth rate, according to a press release.
TABB research argues that institutional investors have been turning to bond ETFs to manage investment flows, enhance returns and limit transaction costs due to liquidity problems.
Specifically, the research points to regulatory burdens, like the Vocker Rule, Basel III and the Liquidity Coverage Ration, that have hampered large banks and forced them to hoard larger caches of quality debt. Consequently, due to the lower supply of quality debt floating around, institutional investors have turned to the corporate bond market.
“Bid/ask spreads for large bond ETFs are substantially more stable than their underlying cash bonds,” Anthony Perrotta, a TABB principal and head of fixed income research, said in the press release. “They’re also being used as a means of exchanging credit risk during times of stress in the underlying market.”
TABB research analyst Colby Jenkins also believes large portfolio managers are utilizing ETFs to smooth out exposure during redemption periods. According to TABB researchers, an investor would only pay 0.01% to 0.03% to trade a liquid corporate bond ETF, whereas certain hard-to-find securities could cost as much as 1.03%.
“A 5-10% liquidity sleeve in corporate bond ETFs that tracks to a diversified portfolio of bonds is becoming a popular tool among asset managers to efficiently manage their investment flows,” Jenkins said.
Meanwhile, Large institutions are holding onto ETFs until they find the appropriate cash bond alternative. The Bond ETFs are popular among investors for their low fees and ease of trade. [Liquidity Concerns in Corporate Bond ETFs]
“This is a way to achieve market beta while the single-name search process carries on,” Jenkins added.
For more information on corporate debt, visit our corporate bonds category.
Max Chen contributed to this article.