Poor Fixed Income Liquidity Contributing to ETF Growth

Penn Mutual Asset Management

December 3, 2015

Poor Fixed Income Liquidity Contributing to ETF Growth Photo

The trading volume of the most popular fixed income Exchange Traded Funds (ETFs) demonstrates a strong, increasing pattern. There are many traditional reasons for this increase in ETF popularity, some of which are below:

  • Lower Expense Ratios – ETFs are known for generally having lower and fewer fees than mutual funds
  • Quick Beta – ETFs can give instant diversification: exposure to many companies and sectors
  • Ease of Large Transactions – It is generally easier and faster to buy $50 million in ETFs than it is to purchase $50 million of bonds

These common reasons were often cited as motivation to utilize ETFs in the past, but based on discussion with the institutional investor community, it appears that liquidity is emerging as one of the more important considerations contributing to the growth in trading volume shown in this week’s chart.

There is a great deal of debate on how to define and determine market liquidity (bid/ask spreads, trading volumes, dealer inventories, etc). For those managing money, however, the bigger issue is that market liquidity has been greatly reduced in both the corporate and structured asset classes, and it is a problem that is getting more difficult to manage.

Key Takeaway: As corporate bond liquidity remains troubling, I expect institutional investors to increasingly turn to fixed income ETFs as a tool for managing their portfolios.

Tags: Chart of the Week | Corporate bonds | Market liquidity | Exchange Traded Funds (ETFs)

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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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