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ETF Specialist

High-Yield Bond ETF Liquidity in Focus

Junk-bond ETFs have become a hot topic in 2015, as liquidity concerns heat up ahead of potential Fed action.

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Asset flows into the two largest junk-bond exchange-traded funds,  iShares iBoxx $ High Yield Corporate Bond (HYG) and  SPDR Barclays High Yield Bond ETF (JNK), have been extremely volatile over the past month or so, reminiscent of the taper tantrum in 2013. It's unclear whether the recent spike in redemptions was primarily a result of strategic investment decisions or if concerns of a potential liquidity crunch were the driving force. Fixed-income liquidity will continue to be a hot topic until the bond market shows it can handle a bout of heightened volatility in the event of a Fed rate hike later in the year.

Thus far, the two most popular ETFs have handled the increase in asset outflows quite well. Since the beginning of May, more than $3.1 billion has been redeemed from iShares' HYG, which currently has about $13.4 billion in net assets. SPDR's JNK, which has about $9.8 billion in total assets, saw outflows of more than $1.5 billion over the same trailing two-month period. These outflows, of course, are a measure of activity in the primary market. Fixed-income ETFs, like HYG and JNK, have essentially provided an additional layer of liquidity to the markets by bringing bonds, which trade over-the-counter, onto the exchange where investors can transact in the secondary market without disturbing the underlying portfolio of bonds.

John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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