Jim Leaviss, manager of the M&G Global Macro Bond fund, one of Europe’s largest active fixed income funds, has said ETFs can make sense when accessing less liquid parts of the market.
Speaking at ETF Stream’s Big Call: Fixed Income event, Leaviss (pictured) said one key advantage of ETFs was being able to access the market very quickly.
He gave the example of the US high yield market where, if he tries to invest $10m in the wider market, it can take all day for the trade to go through while in the ETF market, over $250m on any one day can be traded across the asset class.
However, one issue for the bond manager with US high yield ETFs is they tend to broadly underperform the wider market. As the vehicles have liquidity constraints, he explained, it means they only buy the biggest names in the market.
“I would like to buy ETFs in that market,” Leaviss continued. “However, ETFs do not get access to new issues which is one source of massive alpha in that market and they have liquidity constraints.
“Therefore, these products systemically underperform what we can do in high yield. We keep looking at high yield ETFs but the vehicles are not offering access to the areas we want to buy.”
Furthermore, Leaviss argued there are other ways he can access the bond market through instruments such as the futures market and CDS indices.
Tackling liquidity concerns in fixed income
“We have looked at ETFs but do not use them [for the reasons above]. If people have the skills and ability to analyse parts of the market, then investing in ETFs does make sense.
“There are very few active managers who do not own some passives in their own personal portfolios; I know I do.
“Overall, ETFs have been good for the industry, good for investors and have driven costs down for the whole market.”