High-yield, speculative-grade corporate bond exchange traded funds have gotten a lot of flak over perceived liquidity issues, especially if investors experience periods of extreme market stress.
However, junk bond ETFs have proven to be sufficiently liquid as more investors eschew the primary markets for the ETF investment vehicle instead.
“ETFs that track iBoxx indices have seen unprecedented liquidity over the last month, highlighting their growing popularity among market participants,” according to financial information services company Markit.
For instance, the widely observed iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) both track Markit iBoxx indices.
Specifically, iBoxx backed ETFs experienced a record $27.6 billion of exchange traded volume in June, and the assets under management of iBoxx-benchmarked ETFs now stand at a record $107 billion.
HYG shows an average 12.3 million shares traded per day while LQD has an average volume of 3.6 million shares, according to Morningstar data.
As many ETF observers have noted, volume begets volume. These ETFs that track notoriously illiquid markets have been growing in popularity as investors sought out liquid instruments to express their views on the fixed-income market. While trading volumes in the fund have increased, trading in the underlying debt market has not been particularly elevated, reflecting the increased usage of ETFs as a more liquid proxy for exposure.[related_stories]