Courtesy of Drew Voros & Matt Hougan/IndexUniverse.com
Phil Mackintosh, managing director and head of trading strategy for Credit Suisse, recently visited IndexUniverse’s San Francisco headquarters and sat down with IU’s Global Head of Content Matt Hougan and Editor-in-Chief Drew Voros to talk about fixed-income ETFs, high-frequency trading and other topics.
IndexUniverse: There was quite a brouhaha with fixed-income ETFs—the premiums and discounts. As an opening question, are ETFs a good tool for access in the fixed-income markets?
Phil Mackintosh: Absolutely. They have incredibly good spreads and can often offer investors cheaper and retail-level access to bonds instead of buying individual bonds one by one. Plus, with ETFs trading intraday, investors also have the benefit of being able to trade in and out of them when they want.
In fact, sometimes I think the ETF wrapper can make it so easy for investors to get in and out of an asset class that they forget there are still underlying assets that all need to be traded for arbitrage to occur.
The brouhaha you mentioned is a great example of that. Just after the Fed started to discuss tapering, rates rallied significantly in a short period of time, and bond valuations fell in the underlying bond market. This led to significant bond outflows in both mutual funds and ETFs. And these outflows seemed to cause high-yield bond ETFs, in particular, to sell at a discount to their NAV.
But the fact that high-yield ETFs temporarily traded below NAV was misleading due to the fact that the high-yield bond market itself is mostly illiquid, and as a result, the bond indexes that track it sometimes have difficulty reflecting fair value in fast-moving markets. We also saw this in the credit crisis, but hindsight shows that those ETF discounts were a lot closer to the fair value of the bonds than the underlying bond indexes were.
IU: Do you think investors understand that?
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