Tag Archives: junk bond etf

ETFs Overtaking Swaps for Junk-Bond Speculation:

By Mary ChildsSep 17, 2012

Exchange-traded funds are poised to overtake credit derivatives by year-end as a way to speculate on junk bonds.

The value of corporate securities held by the five-largest junk ETFs almost doubled in the past year to a record $31.4 billion, while the net amount of protection bought or sold on the debt using the two current credit-default swaps indexes declined 3 percent to $35 billion, data compiled by Bloomberg show. The ETFs are growing at an average 5.2 percent monthly pace this year, which would put assets at more than $36.5 billion by Dec. 31.

Trading in credit swaps has slowed as the market faces regulation for the first time under the Dodd-Frank Act, potentially making them harder and costlier to buy and sell. The growth of junk-bond ETFs, which are listed on exchanges and brokered like stocks, has accelerated since their inception in 2007 as investors seek a faster and cheaper way to trade debt.

“Product innovation is often the answer to regulatory change and I don’t think it’s any coincidence that we’ve seen this explosion of interest in fixed-income ETFs just at the point at which CDS as a product and asset class comes under pressure,” Will Rhode, director of fixed-income at research firm Tabb Group LLC, said in a telephone interview.

Gaining Influence

Junk-bond ETFs, which have attracted 25 percent of high- yield fund inflows since 2010 as measured by EPFR Global, are gaining influence in a market where both securities and their derivatives are generally traded off exchanges.

Even investors seeking to hedge against losses on the securities have started using ETFs, with the number of shares borrowed to bet against one run by State Street Corp. surging almost three-fold from the end of 2011.

Credit swaps, created in the 1990s as a means for lenders to protect against losses on corporate debt, gained popularity in the past decade as a way to wager on gains without actually owning bonds or loans.

With the Federal Reserve saying last week it will probably hold its interest-rate target near zero through at least mid- 2015 and conduct a third round of bond purchases to stimulate the economy, investors are gravitating toward the funds to boost returns as demand for default protection diminishes. Continue reading

Junk ETF Bond Volumes Signal Electronic Demand


by Lisa Abramowicz

Trading of exchange-traded funds that focus on junk bonds is soaring while volume in the underlying securities slumps as dwindling dealer holdings prompt investors to seek electronic platforms.

Volumes in the two biggest ETFs in June have climbed 22 percent above the six-month average while overall trading for the debt has sunk 9 percent, according to data compiled by Bloomberg. A record $1.67 billion of shares was traded May 31 in the funds from BlackRock Inc. (HYG) and State Street Corp. (JNK), equivalent to 35 percent of the day’s total volume for U.S. junk debt.

Hedge funds and individual investors recently may be able to articulate a trade more efficiently” through ETFs rather than the actual bonds, said Jason Rosiak, head of portfolio management at Pacific Asset Management, an affiliate of Pacific Life Insurance Co. in Newport Beach, California. “That could be considered an indictment on the bid-offer spread increasing due to dealers not taking a significant amount of risk.”

As trading becomes more difficult in the bonds, people will say trading in ETFs is more efficient,” said Chris Hempstead, director of ETF execution at WallachBeth Capital LLC in New York. “By trading the ETF, you’re transferring the onus for trading the bonds onto someone else.” Continue reading

High Yield Junk Bond ETFs-Eye On Distortions

It appears that our comments re:  junk bond ETFs over the past 6 weeks has inspired main stream media, and in particular, WSJ’s Jason Zweig, to zero in on a talking point raised here last month: the logistics by which certain ETFs are ‘created’ and redeemed, and the potential distortion in prices between the underlying junk held by high yield bond ETFs, and comparable  junk issues that are not components to the most popular high yield bond ETFs. Continue reading