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ETFs Aren’t to Blame for High-Yield Sell-Off


Large junk bond ETFs, such as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) , came under scrutiny amid following an intense June sell-off that sparked concerns regarding the liquidity offered by high-yield bond ETFs and the ability of these products to handle periods of amplified market stress.

BlackRock (BLK), the world’s largest asset manager and the parent company of iShares, the world’s largest ETF sponsor, maintains that ETFs did not make the June junk bond sell-off worse. The firm previously pointed out that although bond ETFs have grown in size over the years, “they still only represent a very small portion of the FI universe, and therefore would not be capable of ‘moving’ the underlying market in a meaningful way.” [iShares ETF Mythbusting: Can Bond ETFs Move The Market?

In new BlackRock research shared with the Wall Street Journal, the firm notes that "while trading volumes in bond ETFs shot up, and share prices declined sharply, a relatively small amount of money was actually withdrawn from ETFs. As a result, ETF fund managers didn’t have to do much selling of underlying bonds," reports Chris Dietrich for the Journal.

Matt Tucker, head of fixed-income strategy at iShares, told the Journal that investors could have seen even wider price swings in the bond market if not for ETFs being there to buffer flows. Junk bonds typically trade in the over-counter-market, but ETFs trade like stocks on traditional exchanges. During the May/June sell-off, one induced by speculation the Federal Reserve was contemplating tapering of its quantitative easing program, sellers pressured the high-yield OTC market, but ETFs became a larger percentage of overall junk bond trading, the Journal reported, citing iShares.

The view jibes with comments made by Citigroup in July. Citi said the volatility of premiums and discounts in junk bond ETFs during times of stressed selling is attributable to "a combination of stale marks in the underlying holdings and arbitrage activity by authorized participants."

Still, Citi views junk bond ETFs such as HYG and JNK as "structurally sound." The bank said these funds operated as expected during a tumultuous period, trading continuously while providing liquid exposure to the high-yield bond market. [Junk Bond ETFs Are Surviving and Thriving Again]

Since June 14, HYG and JNK are down an average of just 0.2%. The two are the largest high-yield bond ETFs with a combined $23.4 billion in assets under management.

SPDR Barclays High Yield Bond ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG and JNK.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.