Billions of dollars have been funneled into speculative-grade, high-yield bond ETFs, fueling some concern over the potential risks in case of a sudden mass exodus.
However, a new study revealed that the newfound popularity of junk bond ETFs will not cause the cash bond market to become more volatile.
Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors LLC, argued that oscillations in the market haven’t grown any more dramatic since the financial crisis as trading and assets in junk bond ETFs increased, Bloomberg reports.
According to a recent study, in the seven years through 2017, junk bond ETFs have actually exhibited less volatility than the cash market itself, which runs in contrast against the widely held concerns that fund jitters are feeding into the underlying assets.
Rising Popularity of Bond ETFs
Due to the rising popularity of bond ETFs that now hold $628 billion in assets under management, there has been growing criticism that bond ETFs are contributing to bubbles in underlying credits and driving volatility in debt markets. Investors singled out ETFs as a potential destabilizing factor that exacerbate selloffs, especially within illiquid credit markets where they have an outsized trading share.
“Surely, no one would argue that ETFs are making the cash market more volatile if it turned out that ETFs are less volatile than the cash market,” Fridson said.
For example, thee iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond ETFs by assets, account for more than $25 billion in assets and 20 million shares traded per day.
Related: The King of Junk Bond ETFs
Since 2010, junk bond daily price volatility showed a mean of 2.28 for HYG and 2.52 for JNK, compared to the higher 2.55 recorded on the ICE BAML U.S. High Yield Index, according to a recent study. Fridson found that high-yield bond volatility has actually slipped over the period as ETFs gained in popularity, compared with the years leading up to the financial crisis from 2000 to 2007.
“The bottom line is that at this point there is no basis for stating that the advent of high-yield ETFs has increased the high-yield cash market’s volatility,” Fridson said in the study.
For more information on the fixed-income market, visit our bond ETFs category.