The extraordinary growth of bond ETFs is one of the less publicised trends of recent years. In the US, for example, inflows into this category exceeded US$230bn between 2014 and 2017 – representing a 47% growth rate. Despite the lack of hype, this has real implications for asset allocators. As the popularity of bond ETFs has grown, so too has the secondary market. The lower chart above illustrates the increase in stock market trades for two of the largest of this kind of ETF. In just three months, for example, the average weekly value traded of HYG3 was US$4.6bn. A similar sized fund, the iShares Investment Grade Corporate ETF (Ticker symbol: LQD), saw turnover of nearly US$2.3bn. Thanks then to the growth of ETFs, an additional ‘mirror’ layer of liquidity has been created in bond markets. Consider, for example, the create/redeem process – a mechanism embedded in the ETFs which allows investors to exchange shares in the fund for an equivalent basket of its underlying bonds. By ‘cracking open’ or ‘unzipping’ the ETF through this mechanism there is potential for equivalent same-day exposures to the underlying bond portfolios, but at a lower cost than through the over-the-counter route. For those in the know, and with the required infrastructure, this can be an efficient means of gaining market access.
Claire Corry, US high yield beta team. Mellon, a BNY Mellon company