Goldman Sachs Group Inc, for example, has reduced its capital-intensive corporate bond inventories, Bernstein Research analyst Brad Hintz said in a recent research note.

While U.S.-listed corporate-bond ETFs hold $106 billion, or about 1 percent of the debt in the $10 trillion U.S. corporate bond market, the relatively new products still pose some risk not usually associated with bonds.

Risks For Investors

ETFs, like stocks, trade constantly throughout a trading day and their value can fall more dramatically than the underlying bonds that they hold, said Brian Callow, director of fixed income at Rockland Trust, a Massachusetts bank with $6 billion in assets. By contrast, some individual bonds don't trade for days or weeks, leaving them less susceptible to redemption mood swings that can hit an ETF.

"One problem I see out there is headlines," Callow said, referring to news that affects the bond market. "Investors have to remember the short-sightedness of headlines. There are periods when ETFs work and when they don't."

Last summer, amid bond-market concern about a potential shift in Federal Reserve policy over interest rates, a cross-section of junk bond ETFs showed price volatility by trading more than 0.5 percent outside their net asset value. That highlights the potential for price dislocations to develop during market turmoil, said Robert Grossman, a managing director at Fitch Ratings.

At the same time, the deviation of an ETF from the value of the underlying bonds during the day could lead to real-time price discovery for the fixed-income market, which otherwise trades with a much longer time lag.

"Fixed-income is both opaque and illiquid," said Elisabeth Kashner, director of research at analytics firm ETF.com, noting that there is little transparency in traditional bond pricing because most bonds, which trade over-the-counter, don't trade every day.
ETFs, on the other hand, can better reflect investor behavior because, like stocks, they trade every day.

BlackRock, Pimco

The rise in ETF popularity is helping BlackRock Inc., State Street Corp. and Pimco attract assets from insurance companies, pension funds, hedge funds and other institutional managers.
BlackRock, the world's largest ETF provider with some $200 billion in fixed-income assets, said institutional investors account for a growing part of the firm's net new business. Its iShares unit has launched some 20 new U.S.-listed fixed-income ETF products over roughly the past 18 months.