Fixed-income exchange traded funds have been a hit with investors who use them to reach the over-the-counter bond markets, but one of the knocks against them is that they haven’t been tested during times of market stress.

Three fund managers who spoke Thursday on a panel at the Morningstar ETF conference in Chicago said that view doesn’t reflect the reality of these vehicles. They said some of the oldest funds have been through stressful market situations and fixed-income ETFs provide more liquidity than some of the underlying investments because of ETFs’ ability to accept cash or in-kind trades. Plus, they can trade on a secondary market and not just the underlying market.

“We’ve had bond ETFs in the market for 14 years. They’ve been through the financial crisis [of 2008], they’ve been through when U.S. Treasuries were downgraded, they went through the European sovereign debt crisis, the taper tantrum and other times,” said Karen Schenone, fixed-income strategist at BlackRock/iShares.

Schenone referenced the periods when U.S. Treasury yields surged in 2013 after the Federal Reserve suggested ending quantitative easing, and when peripheral eurozone member states Greece, Spain, Ireland, Portugal and Cyprus were unable to repay or refinance their government or bank debts in 2009.

During those times, she said, fixed-income ETFs generally reacted in three ways: First, they tended to trade more than the underlying over-the-counter markets which saw reduced trading volume and likely drove investors to ETFs. Second, they tended to exhibit a discount to the net asset value because that reflected the cost of liquidity. Finally, ETFs didn’t see much forced selling of portfolios, at least for the types that took in-kind transfers and not just cash only.

Schenone also noted what happened last December when the high-yield market got whacked by falling oil prices and concerns about the debt issued by energy and commodity companies. During that period, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) saw average daily trading of more than six times its normal level. “That month the ETF traded $30 billion, and 90 percent of the traded shares were in the secondary market and not in the bond market. So it can act as a buffer in a stressed market,” she said.

Jerome Schneider, managing director at PIMCO, said during times of market stress it’s important to realize that liquidity can become expensive.

“Bid and offer spreads will widen to show increased risk,” he said. “There is liquidity and the ability to transfer risk, but it’s expensive.”

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