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Junk Bond ETF Investors Flightier In US Than Europe

Paul Amery

[This article originally appeared on our sister site, IndexUniverse.eu .]


Hot money outflows from US-listed junk bond ETFs during the fourth quarter have so far not been replicated in Europe.

Since October 1 the two largest US-listed high-yield bond tracker funds, iShares’ $ High Yield Corporate Bond Fund (NYSE Arca:HYG) and State Street’s SPDR Barclays High Yield Bond ETF (NYSE Arca:JNK) have seen over $1.7 billion in outflows, as investors cash in after a long period of price rises.

Even after the recent outflows, the two funds are still well up for the year in terms of new assets. HYG has seen its share base expand by 44% in 2012, while JNK is up 26%. The funds currently have $16.1 billion and $11.8 billion in assets, respectively, collectively almost 3% of a US junk bond market estimated at $10 trillion in size.

In Europe, however, assets in iShares’ Markit iBoxx Euro High Yield Bond ETF (IHYG.L), the region’s largest junk bond index tracker with €1.6 billion in assets, have so far held steady during the latest market sell-off.

According to one market maker, there are substantial differences between the US and European junk bond ETFs.

“The US products trade much more in tune with the overall sentiment of the market,” says Lee Williams, partner and head of trading at Bluefin Holdings, a market maker. “And they can be seen as a driver of the underlying junk bond market in the US,” he added.

“But in Europe junk bond ETFs are not yet big enough to affect the underlying markets,” Williams told IndexUniverse.eu. “So even though junk bond prices are off around 5% in the last week, you haven’t really seen that reflected in IHYG’s asset base. And in fact we’re still seeing good demand from UK investors for high-yield products.”

US high-yield ETFs are also much cheaper to trade than their European equivalents, Williams pointed out, something that makes them more susceptible to short-term hot money flows.

“Bid-offer spreads on the US-listed ETFs are ferociously tight,” said Williams, “although the price of the ETFs will move around with respect to the underlying net asset value (NAV). Sometimes ETFs will trade at a premium and sometimes at a discount.”

At the close of New York trading on Thursday iShares’ website reported that the price of HYG was at a 0.33 percent discount to the fund’s NAV, while SPDR reported JNK to have closed at a 0.47 percent discount. HYG traded at a premium of 1.38 percent to NAV as recently as mid-September, a period when inflows to the fund were strong.

“In Europe IHYG trades on-exchange at spreads of between 10-25 euro cents, around 10-20 times higher in percentage terms than for HYG and JNK in the US,” said Williams.

“But there may not be so much depth in the quote at the tightest screen prices in the US,” he continued. “There may only be 2000 shares to trade at the tightest, 1-2 basis point spread quoted in the US market, whereas in Europe you can be confident of trading in a €10 million lot on-screen if a 25 basis point spread is advertised.”


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