The rising reputation of bond trade traded funds might add to dangers in a notoriously illiquid com
The rising reputation of bond trade traded funds might add to dangers in a notoriously illiquid company debt market, particularly during times of heightened promoting strain.
Efe Cotelioglu, PhD candidate on the College of Lugano, the Swiss Finance Institute, has discovered that high-grade securities share related liquidity traits when they’re closely owned by ETFs, Bloomberg reviews.
Consequently, throughout excessive market shocks, buyers dumping these securities will undergo the identical liquidity issues throughout the section. For instance, throughout this yr’s coronavirus pandemic-driven promoting, company bond ETFs skilled a precipitous drop as buyers scrambled to trim their holdings till the Federal Reserve’s help introduced issues again in line.
“Larger ETF possession of investment-grade company bonds can scale back the flexibility of buyers to diversify liquidity danger,” Cotelioglu stated in a paper.
Throughout the top of the volatility earlier this yr, Treasury liquidity suffered a collapse, and gaps between the costs of ETFs and the bonds they monitor emerged. As soon as the Fed acted, the fixed-income markets resumed their calm.
Some have warned concerning the dangers of bond ETFs that monitor a notoriously illiquid market because the rising reputation of ETFs might destabilize their much less liquid underlying markets.
Cotelioglu pointed to an “economically and statistically important” distinction between the co-movement of liquidity in investment-grade bonds within the top-quartile of ETF possession and people within the backside quartile. Moreover, his analysis discovered no relationship between commonality of liquidity and mutual fund possession, which he attributed to contrasting investor bases and structural variations since mutual funds have “discretion” in methods to meet redemptions whereas an ETF can’t choose and select what property it sells.
The examine was performed based mostly on a decade’s price of information ended within the second quarter of 2019. The bond ETF market has since exploded, with fixed-income ETFs attracting about $170 billion in 2020 or greater than fairness inflows and already beating 2019’s report $154 billion in inflows.
For extra info on the fixed-income market, go to our bond ETFs class.
Learn extra on ETFtrends.com.
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