Bond ETFs Can't Shake Off Liquidity Concerns

Meanwhile, loose global monetary policies have depressed bond yields and bolstered prices across the world, limiting the ability of active portfolio managers to outperform passive options, which further fueled the rush toward low cost index-based funds like ETFs.

The ETF industry, though, argues that bond ETFs provide a reference point for investors to more accurately price debt securities or improve price discovery.

SEE MORE: SEC Eases Liquidity Rules in Case of a Run on Bond ETFs

“The increased pricing discovery supported by daily ETF trading in the underlying fixed income holdings helps provide markets with bond prices for securities that otherwise might not have traded hands on a given day,“ James Meyers, director of fixed income product strategy at Invesco PowerShares, told the Financial Times.

For instance, ETF providers pointed to the ETFs’ performance during the closure of Third Avenue Management’s high-yield bond fund last December when high-yield ETFs’ trading volumes increased as investors tried to capitalize on deteriorating bond prices. Consequently, the industry argued that ETFs add liquidity to a market and allows investors more easily move in and out of a bond position without diving into the underlying debt market.

For more information on the fixed income market, visit our bond ETFs category.