Tag Archives: high yield bond ETF liquidity

The Global Chase (Race) to Capturing Yield; High Yield Bond ETF Update

Courtesy of Paul Amery, IndexUniverse.eu

On a longer-term view, last month’s US$1.3 billion net outflow from high-yield bond ETFs looks like nothing more than a blip.

Fixed income trackers are currently the fastest-growing sector of the ETF market and, within that category, high-yield (or “junk bond”) funds have recently attracted the greatest interest. The two largest US-listed funds of this type, iShares’ iBoxx $ High Yield Corporate Bond ETF (NYSE Arca: HYG) and State Street’s SPDR Barclays Capital High Yield Bond ETF (NYSE Arca: JNK) have added around US$10 billion in new assets since October, taking their combined size to nearly US$25 billion.

High-yield ETFs now constitute around 3 percent of the overall junk bond market and generate around 10 percent of the daily trading volume in such bonds, one market observer told IndexUniverse.eu.

ETF evangelists talk of the transformational role being played by such funds in what is traditionally a relatively illiquid sector of the market.

“We’re bringing a revolution to the high-yield bond market by increasing liquidity and pricing transparency,” a senior executive at one ETF issuer told IndexUniverse.eu last month.

“In this prolonged low-rate environment, we continue to see investors turn to high-yielding alternatives…and we’ve cautioned investors accordingly about reaching for yield,” says Vanguard’s CEO, Bill McNabb.

On the face of it, publicly available data support ETF managers’ contention that their funds can offer superior liquidity to the underlying bond markets.

iShares’ flagship European high-yield bond ETF, the €1 billion Markit iBoxx Euro High Yield Bond fund (LSE: IHYG), has traded on its primary (London) listing with an average bid-offer spread of 31 basis points since the fund’s inception in September 2010. By comparison, the weighted average bid-offer spread on the constituent bonds of the ETF’s underlying benchmark, the Markit iBoxx Euro High Yield index, has averaged over three times more during the same period, at 95 basis points.

Trading Costs For IHYG And Its Underlying Index Continue reading