March 2nd, 2015 9:23 am
This morning I posted this article on the surge of assets flowing to corporate bond ETFs. Here is an WSJ piece on the same story:
Via the WSJ:
By KATY BURNE
March 1, 2015 6:02 p.m. ET
Institutions are piling into exchange-traded bond funds at the fastest pace on record, driven by forces reshaping the increasingly illiquid corporate-debt market and their desire to stay nimble ahead of expected interest-rate moves.
Bond ETFs took in $32 billion globally this year through Feb. 26, according to data from Bloomberg LP, in what has been the strongest start to any year since the funds began in 2002.
More than half the $20 billion that flowed into fixed-income ETFs at BlackRock Inc. ’s iShares unit in the first eight weeks of this year came from institutions such as insurers and endowments. In some large funds, institutional money in ETFs has more than doubled in the past few years, the firm said.
The shift is the latest good news for providers of exchange-traded funds, which essentially are index-tracking funds that trade like stocks. Bond ETFs are already popular with individual investors because they have low fees and are easy to trade, qualities that are now appealing to more sophisticated investors who typically focus on hand-picking individual debt securities to beat their benchmarks.
“There was a monster rotation into fixed-income ETFs in February,” coming out of sector-based stock funds, said Reginald Browne, global co-head of ETF market making at Cantor Fitzgerald & Co. He said a client recently traded $1.8 billion in bond ETFs in a single trade.
A host of factors is behind institutions’ adoption of bond ETFs, analysts say. Among them: Deteriorating liquidity in corporate bonds has frustrated large investors as many individual bonds have become difficult to buy or sell quickly at a given price, thanks in part to rules limiting banks’ risk-taking.
U.S. corporate debt outstanding has grown by more than $2 trillion since the financial crisis to $7.7 trillion, but trading in many bonds has slowed as new rules caused dealers to pare their holdings by two-thirds from precrisis levels.
“You can’t get things done in a day anymore” in bonds, said Cliff Noreen, president at $212 billion money manager Babson Capital Management LLC, who saw an ETF sales pitch by iShares last year. “It’s more like a week.”
Meanwhile, billions of dollars have flowed into ETFs after an exodus from the giant Pimco Total Return fund peaked last fall, when longtime manager Bill Gross left Pacific Investment Management Co. for Janus Capital Group Inc.
The top 10 bond ETFs have returned 1.57% so far this year, while the top 10 bond mutual funds have returned 0.89%, said fund tracker Lipper.
Institutions’ growing adoption of bond ETFs could improve those funds’ performance and their ability to track baskets of bonds in a choppy market.
Some of the popularity of ETFs may be coming at the expense of derivatives long seen as an attractive means of getting broad exposure to bonds. Average daily trading in U.S. index credit-default swaps has fallen to $5.3 billion this year from $8.5 billion a year earlier, according to Markit data.
Some worry that the ETFs haven’t been tested sufficiently amid a three-decade-long bond price rally. In the second quarter of 2013, when the Federal Reserve signaled it could raise rates faster than anticipated, withdrawals from corporate-bond ETFs exceeded $250 million on 15 days, three times the average frequency since 2013, said Fitch Ratings.
The mismatch between the accelerating ETF growth and slow trading in bonds also raises the risks of forced selling, if there are ever significant enough outflows from the funds to depress their underlying asset prices, said Jeffrey Meli, co-head of fixed-income research at Barclays PLC.
But the growth in fixed-income ETFs has brought efficiencies and “generated a trading opportunity,” said Ari Rubenstein, chief executive of high-frequency trading firm Global Trading Systems LLC. “As the volume increases, more institutions will be attracted to that.”
BlackRock and others have gone on the offensive, selling their customers on the advantages of ETFs, including publicly quoted prices and liquid trading conditions. Teams from BlackRock’s iShares unit, the world’s largest ETF provider, have been crisscrossing the U.S., pitching bond ETFs as a cheap and easy way for institutions to manage their cash fluctuations at an unpredictable time in the bond markets.
There are now 260 bond ETFs, up from 62 in 2008, according to research from Tabb Group. Last month, DoubleLine Capital LP, run by bond maven Jeffrey Gundlach , teamed up with State Street Global Advisors on their first joint bond ETF.
Big banks are responding by retooling their trading desks. Citigroup Inc. and J.P. Morgan Chase & Co. in recent months combined their credit ETF trading units with equities groups that have been quoting ETFs and managing their risks for longer, said people familiar with those firms. The changes also have enabled institutions to trade ETFs in “blocks,” or larger sizes than would be quoted on exchanges.
The growth in bond ETFs stands to further compress transaction costs, to the benefit of retail investors, traders and analysts said. An investor would pay 0.01%-0.03% to trade a liquid corporate bond ETF, but as much as 1.03% for certain hard-to-find securities, Tabb researchers found.
The Employees Retirement System of Texas disclosed in 2013 that it had put about $2.7 billion into bond ETFs, and hedge-fund manager Pine River Capital Management LP held $197 million in a short-term, high-yield bond ETF as of Dec. 31, filings show.
Jim Ross, global head of the SPDR family of ETFs at State Street Global Advisors, said he has been working closely with institutions like insurers for several years, and they are “just starting to use them.”
Brendan Dillon, a senior investment manager at Aberdeen Asset Management Inc., now has permission to use bond ETFs for up to 5% of the firm’s $5 billion high-yield-bond portfolio. He said he was skeptical when iShares first pitched him in April 2012, but he became convinced that the ETFs are doing a better job of tracking bonds than other instruments.
Aberdeen is “more open now than we have ever been” to bond ETFs, Mr. Dillon said.
Write to Katy Burne at firstname.lastname@example.org