Prices on that fund’s biggest holding, Sprint Corp.’s $4.25 billion of 7.875 percent notes due in 2023, have swung by as much as 4.2 cents this year, compared with a 1.95-cent fluctuation in a Bank of America Merrill Lynch index that tracks U.S. bonds with BB ratings.
The fund’s third-biggest holding, First Data Corp.’s $3 billion of 12.625 percent notes maturing in 2021 and rated Caa1 by Moody’s Investors Service, have moved in a range of 4.55 cents, Bloomberg data show.
ETF-owned bonds “are often first movers when the high- yield market pulls back or rallies,” Wells Fargo analysts wrote in a Feb. 28 report.
Illuminating Swings
The number of fixed-income ETFs has grown, with firms from Pacific Investment Management Co. to Guggenheim Investments starting funds to invest in junk bonds. The second-biggest high- yield bond ETF is State Street Corp.’s $10.2 billion SPDR Barclays High Yield Bond fund that trades under the ticker JNK.
The funds don’t exacerbate volatility, said Stephen Laipply, a BlackRock product strategist who focuses on fixed- income ETFs. They only illuminate price swings inherent in more- frequently traded securities, he said.
ETFs sell shares pegged to the value of a portfolio of assets. When they receive redemptions, they deliver securities to authorized dealers to sell into the market. When they receive deposits, they sell shares to the dealers in return for a basket of assets that usually try to mimic returns on a designated index.
While they’re marketed to individuals, a growing number of institutions are using ETFs as a way to slip in and out of broad cross-sections of debt that would take days or weeks to assemble by purchasing each individual security.
Narrowing Gap
“Liquidity for corporate-bond investors cuts both ways; it can work to your advantage and it can hurt you,” Wells Fargo’s Bory said in a telephone interview. “If you’re happy with certain credits, you may want to move away from the more-liquid security into the less-liquid securities.”