Robust Liquidity For This High-Yield Bond ETF

A common criticism and arguably debunked myth surrounding high-yield corporate bond exchange-traded funds is that liquidity, during times of market stress, can be hard to come by. Simply because some critics hold a particular point of view does not make it accurate, and there have been plenty of instances where the iShares iBoxx $ High Yid Corp Bond (ETF) HYG has proven sufficiently liquid.

Don't Believe Something Just Based On 'Truisms'

This is important not just because there are critics who do not want to believe HYG and rival junk bond ETFs can deliver ample liquidity under trying circumstance. Durable liquidity in high-yield bond ETFs is vital because more and more professional traders are turning to these products to skirt the dubious liquidity of individual high-yield bonds.

Good news: Data suggest some junk bond benchmarks are seeing improving liquidity.

Related Link: What Investors Need To Know About Record-Low U.S. Treasury Yields

“iBoxx benchmarked ETFs, which ended the month with an all-time high of $107bn of assets under management, saw their largest single trading month on record in June. The 197 iBoxx tracking ETFs enjoyed a combined $27.6 billion of trading volume in June according to the Markit ETF analytics database. These volumes overtook the previous monthly record seen in December of last year when iBoxx benchmarked ETFs saw an aggregate $23.3 billion of trading volume,” according to a Markit note.

Markit is the index provider for HYG's underlying benchmark, the Markit iBoxx USD Liquid High Yield Index. The research firm also provides the index for the iShares iBoxx $ Investment Grade Corp Bd Fd LQD. HYG and LQD have over $46 billion in combined assets under management.

Keeping Things In Perspective

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.

As was seen during the taper tantrum of 2013, the secondary market for ETFs bolsters available fixed income market liquidity and can act as an efficient price discovery mechanism for the issues held by a fund such as HYG.

“Most of this liquidity was seen in the US listed corporate bond funds, as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and iShares iBoxx $ Investment Grade Bond ETF (LQD), saw a total of $23 billion of turnover over the month (June),” according to Markit.

LQD has added $4 billion in new assets this year, while HYG has seen inflows of over $626 million.