According to VanEck, the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which tracks the BofA Merrill Lynch US Fallen Angel High Yield Index, will execute a rule change on September 30 to raise the minimum amount of outstanding permissible for each bond issue from $100 to $250 million. Consequently, about 7.4% of its current index will be shed.
“We see this as a positive move that should help improve the overall liquidity of the index’s universe while imposing relatively minimal impact on potential performance and composition,” Meredith Larson, Product Manager, VanEck Vectors ETFs, said in a note.
The changes come as the industry faces increased scrutiny on potential liquidity issues in bond-related ETFs, especially as we face a rising interest rate environment.
Some observers have warned that after the 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 argued that while liquidity seems ample during normal conditions, liquidity can dry up during volatile markets.
High-profile market watchers, such as Bill Gross, Howard Marks, Noriel Roubini and Carl Icahn, have voiced concerns over potential liquidity problems between quick ETF trades and difficult-to-price junk bonds, reports Chris Dieterich for Barron’s.
ANGL’s rule change will remove a number of small components that tend to be less liquid and more difficult to trade due to the smaller dollar issues. Smaller debt securities typically trade less frequently than larger junk bonds, especially in the notoriously illiquid speculative-grade debt market.
“This is likely to have two very positive effects,” Larson added. “First, market makers in the ANGL ETF will no longer see bond issues smaller than $250 million in creation and redemption baskets, with positive ramifications for their estimated cost of trading those baskets. Second, eliminating hard-to-trade smaller positions from the underlying Index could help improve ANGL’s tracking error, as the ETF may now be more closely aligned with the Index’s constituency.”
For more information on the fixed-income market, visit our bond ETFs category.