It isn't just about premiums, though. In the fourth quarter of 2009, another high-yield bond ETF, iShares iBoxx $ High Yield Corporate Bond Fund, posted both premiums and discounts to its share value. On December 14, the premium peaked at 2.15%, while on October 1 it was trading at a discount of 0.9%. Through the quarter, on only five of 64 trading days was the ETF's share price within 0.5% of its net asset value.
The swings were even wider in the first quarter of 2009. The iShares fund had several days during that period when premiums were more than 6% of NAV and also saw occasions when discounts were greater than 3%. In the same quarter, the SPDR Barclays Capital High Yield Bond ETF swung from a premium of more 12% on January 5, 2009, to a discount of 4.9% on March 2.
Premiums and discounts cut both ways. Just as inflows pushed up premiums last year, once interest rates rise and bonds lose appeal, the selloff in these funds will lead to discounts, meaning the shares will be sold for less than their underlying value.
"Premiums were large last year [because of bond ETFs' popularity] but, when people rush out next year when rates go up, it could cause discounts," said Hougan.
Investors, he added, should be "nervous" about a bond ETF with a premium or discount of 1% or more from its NAV.
That said, investors shouldn't necessarily avoid bond ETFs. "You need to weigh the differences," Hougan said. "Mutual funds are usually more expensive and slightly less tax efficient."
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