Are ETFs Making the High-Yield Bond Market More Volatile?

ETF Trends

High-yield bond ETFs have exploded in popularity in recent years with investors desperately seeking to boost income. As assets invested in the sector continue to grow at a rapid pace, ETFs face charges they are contributing to volatility in the high-yield debt market.

“Aside from headline risk, the momentum swings in high-yield retail fund flows is another risk institutional investors face. Over the last few years, mutual funds and ETFs have grown from 15% to an estimated 25% of the high-yield market. This represents the highest level on record,” according to a recent paper from Guggenheim Partners.

“High-yield ETFs, a relatively new product, have grown from $50 million to almost $30 billion over the past five years. The recent upward trend in volatility, currently near post-2008 recession highs, can be partly attributed to the increased significance of high-yield mutual funds and ETFs,” Guggenheim added.

Still, ETFs have provided a low-cost and liquid vehicle for individuals to invest in high-yield bonds. The funds can, however, trade at a premium or discount to net asset value when the market is moving fast. [Look Before You Leap Into High-Yield Bond ETFs]

Although ETFs that invest in high-yield bonds have grown in assets along with volatility, it’s not clear if ETFs are the primary cause of the wider price swings.

“Uncertainty breeds volatility,” said Kevin Quigg, the global head of strategy and consulting at State Street’s ETF group, in a Bloomberg story earlier this year. “The volatility that’s being expressed in the marketplace is much more reflective of what’s going on in the broader marketplace.”

ETFs aren’t responsible for the price swings but have made the market more transparent, said Matt Tucker, the head of iShares Fixed Income Strategy at BlackRock.

The iShares ETF “has made the high-yield market visible for the first time for investors,” Tucker told Bloomberg. “They hadn’t realized that the high-yield market was that volatile. It was always that volatile; it just wasn’t that easy to see.”

The largest high-yield bond ETFs include:

  • iShares iBoxx $ High Yield Corporate Bond Fund (HYG)
  • SPDR Barclays Capital High Yield Bond ETF (JNK)
  • PowerShares High Yield Corporate Bond Portfolio (PHB)
  • PIMCO 0-5 Year US High Yield Corporate Bond Index Fund (HYS)

Full disclosure: Tom Lydon’s clients own HYG and JNK.

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