Investors are putting record amounts of money into exchange-traded funds as bonds become increasingly difficult to buy and sell.
Global fixed-income ETFs, which track bond indexes and trade like stocks, attracted $60 billion of inflows this year through May 25, according to data compiled by BlackRock Inc. That’s the most for the period since the funds were created 14 years ago and on pace to top last year’s record total of $93.5 billion.
The funds are emerging as one of the few winners from worsening trading conditions as dealers pull back from making markets and investors seek cheaper ways to take and hedge credit exposure. Liquidity and ease of use are the top reasons given by about 70 percent of bond ETF users, according to a report by Greenwich Associates.
“Record inflows tell us fixed-income ETFs have an even bigger role to play going forward,” said Allan Lane, London-based managing partner of Twenty20 Investments LLP. “With one click you can access the whole market. It seems there’s no stopping them.”
Fixed-income ETFs manage about $576 billion of global assets, ranging from Treasuries to high-yield corporate bonds and emerging-market debt. BlackRock, the biggest provider of the funds, started Europe’s first ETF for mortgage-backed securities last month.
The funds allow investors to access markets they may not otherwise be able to, said Peter Sleep, a London-based senior money manager at Seven Investment Management LLP, which oversees about $10 billion.
Market Access
“Ten years ago, I’d never invested in high-yield or emerging-market debt or convertible bonds,” Sleep said. “I came into those through buying ETFs.”
Though ETFs remain a small part of the $1.3 trillion high-yield market, they’re gaining in popularity. BlackRock’s $15 billion iShares iBoxx $ High Yield Corporate Bond ETF, the largest for high-yield debt, averaged 14 million shares a day in trading this year through May 27 -- more than triple its volume two years ago.
“It’s an easier way to deploy excess cash than buying bonds,” said Anthony Robertson, head of global leveraged finance at BlueBay Asset Management in London, which oversees $58 billion. “If we bought bonds, we would run the risk of not being able to sell them at a later date because they’re illiquid.”
Trading costs are lower for high-yield ETFs than for junk bonds, according to CreditSights. The average difference between the prices at which traders buy and sell the iShares Euro High Yield Corporate Bond UCITS ETF is 0.17 percentage points, according to data from Bloomberg and CreditSights. That compares with an average gap of 0.92 percentage points for euro-denominated securities with the three highest junk ratings, the data show.