Bond ETF Liquidity Concerns May Be Overblown

The growing popularity of bond exchange traded funds has been accompanied by increased liquidity concerns that some argue could threaten the balance of the markets. However, one of the main U.S. exchanges argues that bond ETFs actually make fixed-income markets more stable.

Bats Global Markets contends that ETFs could be the “release valve” if bond markets came under pressure instead of exacerbating liquidity and compounding volatile swings, Financial Times reports.

SEE MORE: Addressing Corporate Bond Liquidity Challenges

The fixed-income segment of the ETF universe continues to expand, with long-dated debt funds attracting $70.35 billion in net inflows so far this year, compared to the larger universe of equity ETFs, which have only brought in $54 billion.

Investors have increasingly turned to bond ETFs as a means to gain exposure to fixed-income markets as ETFs allow anyone to access debt exposure through a basket of underlying assets, typically trading more frequently than the underlying debt securities.

However, some naysayers have warned that after plunge in yields and rising popularity of fixed-income ETFs, these bond ETFs that track illiquid debt securities could find it difficult to redeem shares in the event of a major sell-off if interest rates were to suddenly rise. Many market observers argued that while liquidity seems ample during normal conditions, liquidity can dry up during volatile conditions.

SEE MORE: ETFs Help Bolster Market Liquidity for Investors in Times of Distress