“Institutions’ need for liquidity has been a primary driver of fixed income ETF demand,” Andrew McCollum, an analyst at Greenwich Associates, told the FT.
McCollum pointed out that trading volume since 2008 in the five largest bond ETFs have risen much faster than their asset growth, which suggests that intraday liquidity has been an important factor for investors who want to quickly weave in and out of the market.
Nevertheless, the Bank of International Settlements has issued a warning on the perceived liquidity or “liquidity illusion” of bond ETFs. Specifically, the international body warned that investors may find it difficult to liquidate their ETF holdings in a steep market sell-off.
Ken Volpert, global head of fixed income indexing for Vanguard, on the other hand, argues that using bond ETFs is typically more efficient than trading individual fixed-income securities, especially in corporate and speculative-grade debt markets.
“It makes more sense to buy an ETF than the individual securities for long-term investors that want access to a diversified basket of bonds,” Volpert said.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.