As exchange-traded funds have become important parts of professional investors' toolboxes and as concerns about high-yield bond market liquidity have at various points in recent years surfaced, professionals have increasingly turned to junk bond exchange-traded funds.
That much is confirmed not only by the significant amount of assets parked in ETFs such as the iShares iBoxx $ High Yid Corp Bond (ETF) HYG and the SPDR Barclays Capital High Yield Bnd ETF JNK, but also by the recent uptick in volume in these products.
Liquidity
In fact, data suggest investors are increasingly turning to junk bond ETFs to express views on the high-yield bond market rather than individual bonds. That can be seen as a sign that some professional investors view junk bond ETFs as more liquid than the bonds held by these funds.
“High yield (HY) corporate bond ETFs are continuing to gain favor among HY investors, according to Fitch Ratings. This likely reflects investors' liquidity preferences during a period of elevated HY market volatility and falling bond prices during 2015 and the beginning of 2016,” said Fitch Ratings in a statement.
Despite all the oft-cited concerns about the liquidity of high-yield bond ETFs during times of elevated market stress, funds such as HYG and JNK have proven their mettle during “taper tantrums” and other episodes of junk bonds following out of favor. Much of the resilience of an ETF like HYG can be attributed to the secondary market for these ETFs.
Secondary Markets
The secondary market for junk bonds and ETFs like HYG is vital because during times of heightened market stress, over-the-counter, high-yield bond market liquidity can and does evaporate, forcing the bulk of trading into the largest, most liquid issues.
“Trading volumes of HY ETF shares have risen relative to the trading volumes of HY bonds over the past year, spurred by concerns over a potential China slowdown and continued commodity price pressures. The trading ratio of HY ETF shares to HY bonds reached a record high of 42 percent on Dec. 11, 2015, and subsequently reached above 20 percent on several days through end-February,” according to Fitch.
The research firm points out that high-yield bond ETFs remain a scant percentage of the overall junk bond ETF universe, noting these ETFs had a combined $34 billion in assets under management at the end of February compared to $1.2 trillion in junk debt outstanding.
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