In light of rising concerns about bond exchange traded funds, large fund providers are coming together to make fixed-income products easier to use by providing standardized data points.
Providers including BlackRock (NYSE: BLK), State Street (NYSE: STT), Fidelity Investments and Pacific Investment Management Co. are working with Bloomberg on a new metric for over 100 funds in the U.S. and Europe, or a combined 40% of global fixed-income exchange traded product assets, the Wall Street Journal Reports.
“It’s creating a common language for quoting in terms of yield and spread,” Stephen Laipply, a product strategist for BlackRock’s model-based fixed income portfolio management group, told the WSJ.
Other financial firms are also trying to improve bond ETF trading. For instance, MarketAxess Holdings (NasdaqGS: MKTX), an electronic corporate bond trading platform, is crafting a way to make it easier for market makers to find and trade bonds used in a products’ underlying basket of securities.
Bond ETFs have come under greater scrutiny as we move toward the first interest rate hike in almost a decade. Some observers believe that higher rates could trigger huge selling pressure in bond ETFs, notably in speculative-grade investments, which could cause market makers to see pricing discrepancies in the notoriously illiquid underlying debt securities markets.
For instance, Carl Icahn has been a vocal critic, warning that illiquidity in the bond markets could lead to problems for fixed-income ETFs, especially if investors suddenly rush toward the exits. [Liquidity Concerns in Corporate Bond ETFs]
“The worst thing these providers could do is nothing in response,” to concerns about bond ETF structure, Ben Johnson, head of ETF research at fund-research firm Morningstar, told the WSJ.
ETF providers and some other proponents, though, argue that ETFs help alleviate liquidity concerns since ETF investment activity on exchanges are much higher than traditional over-the-counter markets where bonds are traded. [Reviewing the Liquidity of Junk Bond ETFs]
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.