Large money managers and institutional investors are relying more on ETFs to quickly and easily gain exposure to the fixed-income markets instead of directly dealing with individual debt securities.
Among the novelties that ETFs have helped bring to the financial markets, the so-called credit portfolio trade where investment banks and asset managers quickly exchange multi-million dollar, multi-faceted blocks of corporate bonds has gained in popularity as a way to execute big debt orders with ETFs, the Financial Times reports.
For example, in midday October 25, 2017, AllianceBernstein executed a $500 million trade in nearly 50 different corporate bonds at the same time. Instead of a bank, which now act more like facilitators than absorbers of big trades, AllianceBernstein was able to efficiently and quickly execute the trade through the portfolio trades.
“We are using the ETF ecosystem to move blocks of risk around,” Jim Switzer, head of credit trading at AllianceBernstein, told the Financial Times. “We’re not playing the role of banks. But when we are also liquidity providers in a dislocated market, we get better execution and generate alpha.”
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Portfolio trading or basket trading has existed in the equity market. However, it is harder to achieve in the corporate bond market since a lot of trading is done by phone. Big blocks of debt have been traded but each are done individually and by hand, which has made the process quite tedious.
With the emergence of bond ETFs, a new trading environment for those who want to buy and sell large chunks of corporate bonds without relying on credit derivatives has become more readily available.
“Portfolio trades are a low-cost, efficient solution for a lot of people,” Jason Brauth, a senior credit trader at Goldman Sachs, said in a note. “Ten years ago, we would have individually priced each bond in a bundle. Now we price the entire basket, like in equities.”
Investment banks like Goldman Sachs act as “authorized participants” in the ETF market, or intermediaries that manage the creation and redemption process that help ETFs reflect their underlying market or net asset value.
For more information on the fixed-income market, visit our bond ETFs category.