“ETFs were seen as a long-only product but the short side is increasingly developing, allowing investors to put on both sides of a trade,” Brett Pybus, head of fixed-income product strategy for Europe, the Middle East and Africa at the Blackrock’s iShares unit in London, told Bloomberg. “CDS indexes were previously considered the only option for hedging corporate bond portfolios as there were few alternatives.”
Due to the growing popularity and vast liquidity of corporate bond-related ETFs, more investors have turned to ETFs as a way to play the corporate debt market as opposed to trading less liquid individual debt securities. For instance, according to Markit, a monthly average of 7 billion euros of contracts linked to high-yield bond indices in Europe and the U.S. were bought and sold since the market started electronically confirming trades in March.
Popular corporate bond ETFs, like the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) have been heavily traded. According to Morningstar data, HYG shows an average daily volume of 8.2 million shares with $14.3 billion in assets under management. LQD has about $24.0 billion in assets and shows a 3.0 million average daily volume.
Additionally, fixed-income investors can also hedge their corporate debt exposure with inverse high-yield and investment-grade corporate debt ETFs. For instance, the ProShares Short High Yield ETF (NYSEArca: SJB) takes the inverse -1x or -100% daily performance of the Markit iBoxx $ Liquid High Yield Index, and the ProShares Short Investment Grade Corporate ETF (NYSEArca: IGS) tracks the -1x or -100% daily performance of the Markit iBoxx $ Liquid Investment Grade Index.
ETF investors can also hedge against the rising credit risk through a credit default swaps-related ETF, the ProShares CDS North American HY Credit ETF (BATS: TYTE). [An ETF to Help Manage Rising Credit Risk]
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.