Industry Updates

ETFs are not promoting a junk bond bubble: State Street

David Tuckwell

Despite the rocketing rise of passive investing, some investors remain suspicious of ETFs. Many believe they could be responsible for nasty market dynamics, like bubbles, Ponzi schemes and systemic risk.

This is especially true in the corporate junk bond space. Thus the financial press this year has carried several pieces claiming corporate junk bond ETFs are weapons of mass destruction.

But according to State Street this is wrong.

"ETFs only make up 2% of fixed income assets," said David LaValle, State Street's head of capital markets, on a conference call with the press.

"The biggest winner by market share in the fixed income ETF landscape have been high yield bonds. But despite that relative growth notionally the market share of high yield ETFs has not passed 4% of the high yield exposure in the market."

While equity ETFs have been kicking off around the globe for several years, bond and fixed income ETFs have only just started to draw in big money.

Though it may seem counterintuitive, corporate junk bonds have been among the most successful with investors, attracting more money than safer types of fixed income ETF.

This is partly because they offer something new. Historically, corporate junk bonds have been available only to institutional investors and kept off exchange. When households wanted to buy in, they have had to work through unit trusts or some other kind of fund.

But ETFs are changing that, allowing corporate junk debts to trade both on exchange and opening up a previously obscure (and risky) asset class to retail customers.

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