Here’s the latest sign ETFs are beating down the door into the clubby world of European corporate debt.
Trading in an $11.2 billion BlackRock Inc. fund that holds euro-denominated credit has climbed to about 3% of volume in the region’s high-grade corporate bonds, according to monthly data provided by the asset manager. While still a modest slice of the pie, that’s around double the average over the past five years.
The largest fixed-income ETF in Europe -- ticker IEAC -- is headed for its biggest monthly inflow ever in June, following sizable withdrawals in May. Ups and downs in flows are becoming typical as assets in the fund have grown 47% this year.
Exchange-traded funds like BlackRock’s, which hold portfolios of bonds but trade like stocks, are injecting much-needed liquidity into a market that’s long been conducted at a glacial pace with big gaps between bid and offer prices.
As credit rallies spurred by dovish signaling from central banks, investors are dipping in and out of fixed-income ETFs at an increasingly frenzied pace, going long and short, hedging other exposures, even warehousing cash ahead of new bond sales.
Given “more assets, a broader investor base, more uses for the ETF and some volatility in the market, you would expect to see flows and trading volumes to continue to increase,’’ said Vasiliki Pachatouridi, fixed income product strategist at BlackRock’s iShares.
Investor-to-investor trading volumes have nearly doubled year-on-year, according to Pachatouridi. Institutional investors from pension funds to insurers are able to push through large block trades of IEAC shares.
Even as they churn more, ETF flows aren’t always a reliable indicator of sentiment. Sometimes outflows point to a busy market for new bond sales: investors keep ETFs in store when the primary market is slow, then sell them to get cash when new issues hit.
“There is much more appetite for fixed-income assets,’’ said Mark Fitzgerald, head of Europe ETF product management at Vanguard. “Clients that were more equity-focused are now looking at the diversification you get from fixed income.’’
That’s also raising red flags.