Exchange traded funds that invest in high-yield corporate bonds have grown by leaps and bounds in recent years, and some say they are impacting bond prices and adding to volatility in the market. However, correlation doesn’t mean causation and there may be other, more important factors at work contributing to bond price swings.
“Exchange-traded funds that track high-yield bond indexes exceed $22 billion, up from about $2 billion three years ago. While that’s just 2% of the $1 trillion in U.S. corporate speculative-grade debt outstanding, ETFs are among the biggest holders of benchmark securities,” Bloomberg reported Friday.
ETFs that track “junk” bonds include SPDR Barclays High Yield Bond (NYSEArca: JNK - News ), iShares iBoxx High Yield Corporate Bond ETF (NYSEArca: HYG - News ) and PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEArca: PHB - News ).
“These large concentrations of holdings have a dramatic impact on individual issues,” said Jason Rosiak, the head of portfolio management at Pacific Asset Management, in the article. “When the market is up the offers on these issues will be higher and conversely when the market is lower, or there are expected outflows, bids dry up quickly or are lower on the names held in the ETFs.”
Equity-based ETFs are also influencing individual stock prices, according to a recent Goldman Sachs study. [ETFs’ Impact on Individual Stock Prices]
Junk-bond ETFs have attracted interest with income-starved investors searching for yield in a low-rate environment. [ETF Spotlight: High-Yield Bonds]
Although ETFs that zero in on bonds have grown in assets along with volatility in fixed-income securities, it’s not clear if ETFs are the 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 the Bloomberg story. “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.”
iShares iBoxx High Yield Corporate Bond ETF
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