NEW YORK Aug 14 Exchange-traded funds are
playing a bigger role in the U.S. fixed-income market as
investors have flocked to corporate bond ETFs at the same time
that dealers slash inventories, according to a Fitch Ratings
report released Wednesday.
The five largest investment-grade corporate bond ETFs
totaled about $46 billion in assets at the end of June, compared
with dealer inventories of about $9 billion, according to the
The rising interest in ETFs comes as dealer holdings of
corporate bonds have dwindled over the past few years, as banks
become more risk-averse and regulatory capital weightings have
discouraged the warehousing of large positions.
For high-yield corporate bonds, ETF assets totaled about $28
billion, or roughly four times the $7 billion in dealer
Trading activity of high-yield corporate bond ETFs also
climbed on increased market volatility in late May, the report
noted, showing that investors are using ETFs to "rapidly enter
and exit fixed-income positions during a period of market
Average daily trading volumes for the five largest
high-yield corporate bond ETFs more than tripled to more than
$1.5 billion in early June, from about $470 million in early
That increased trading volume, however, could amplify
overall bond market volatility, the report warned, as redemption
of ETFs can in turn drive selling in the underlying bonds.
ETFs track a basket of securities, such as bonds, and can be
traded in real time on exchanges like stocks. They offer access
to indexes without having to buy the individual underlying
The Fitch analysts cited research from the Federal Reserve
Bank of New York indicating that liquidation of more than $250
million in corporate bonds in one day by an investor or dealer
could begin to adversely affect bond prices.