“As the bond market talks about electronic trading on platforms one day, the bond ETF is making it happen on exchanges today,” Wiedman and Prager said. “ETFs have become the easiest way for US and European investors to trade bond risk without a middleman. The bond ETF is adding liquidity, sharpening price discovery, and reducing pressure on banks’ balance sheets, especially under stress.”

Fixed-income traders are now trading directly with other investors on an equity exchange through bond-related ETFs, a “transformational concept in the bond markets,” according to the strategists.

Specifically, the advent of ETFs has helped bond investors to efficiently price and gain bond exposure as opposed to diving directly into the notoriously illiquid underlying markets. For instance, it costs about 50 basis points to acquire a bunch of high-yield debt in the U.S., whereas it costs 1 basis point in spread for the same exposure in a liquid, high-yield ETF. For the Eurozone market, high-yield bonds cost 60 to 70bps, compared to the 13bp spread for an ETF.

Trading volume also reveals the rising preference for ETFs. High-yield bond ETFs traded on an exchange average show volumes of about $3 billion per day, compared to the $9 billion in the underlying cash market and $6 billion for index credit derivatives.

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