While it’s easy to buy ETFs, concern is growing that it may not be as simple to get out when sentiment sours. Federal Reserve Bank of Dallas President Robert Kaplan and Oaktree Capital Group LLC’s Howard Marks are among those warning that investors may be underestimating the difficulty of exiting the investments.
Investors who are already paying active managers may also balk at the additional fees associated with the funds. For some investors, those may outweigh the benefit of lower transaction costs, according to David Watts, a credit analyst at CreditSights in London.
“Active managers are concerned that it doesn’t look good if they’re outsourcing funds to a passive manager,” he said.
‘Massive Shift’
There will be a "massive shift" into passive investing amid consolidation in the asset management industry, BlackRock’s Laurence D. Fink said at a conference on Tuesday. Active fund managers are struggling to beat benchmarks, sending disappointed investors into low-cost index funds.
Investors are increasingly using the funds as a liquidity buffer for core debt holdings. They’re buying and warehousing ETFs when there’s a dearth of new bond offerings and selling them to get cash for new issues when primary markets restart, Watts said.
That was highlighted last month, when investors redeemed about $3.6 billion from BlackRock’s U.S. high-yield ETF in six days as the pipeline for high-yield offerings grew, according to the asset manager.
“Investors are using them for tactical allocations like a transition vehicle,” Watts said. “They want funds available if they need them, without having to take the pain or distortion of selling individual bonds.”
Short Positions
Investors stepped up their use of fixed-income ETFs to express negative views on debt markets this year. Short positions on European bond funds exceeded $1 billion for the first time in February, though they’ve since fallen to about $361 million, according to Markit Ltd.
The funds are also emerging as an alternative to credit-default swaps amid concerns the primary hedging tool of the past decade is becoming less effective.
“We used to use credit derivatives to hedge, but we found the indexes were not correlated very closely with the bond market,” said Olivier de Parcevaux, a high-yield fund manager at Butler Investment Advisors SAS in Paris, a total-return hedge fund with 200 million euros ($223 million) of assets under management.
Parcevaux, whose firm has tripled its use of bond ETFs since starting to trade them in 2011, also uses them in arbitrage trades against total-return swaps, another type of derivative used to wager on corporate bonds.
“Bond ETFs have become like whales in the market,” said Regina Borromeo, a London-based money manager at Brandywine Global Investment Management, which oversees $70 billion of assets. “They’re only going to get bigger as bond market liquidity worsens.”