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Vanguard still is not comfortable with junk bond ETFs
November 19, 2015 / 12:03 AM / in 2 years

Vanguard still is not comfortable with junk bond ETFs

NEW YORK (Reuters) - Vanguard Group's top bond executive said his company is not comfortable enough with passive junk bond exchange-traded funds to offer them, citing concerns about such ETFs' ability to track their market.

Principal and global head of Vanguard Fixed Income Group Greg Davis speaks at the Reuters Global Investment Summit in New York, November 18, 2015. REUTERS/Brendan McDermid

Principal and global head of Vanguard Fixed Income Group Greg Davis speaks at the Reuters Global Investment Summit in New York, November 18, 2015. REUTERS/Brendan McDermid

But Vanguard is “likely” to again consider offering them in the future, said Greg Davis, global head of Vanguard’s fixed income group at the Reuters Global Investment Outlook Summit on Wednesday in New York.

“It’s something that we’ve looked at. We just haven’t had a tremendous comfort level with it up to this point,” he said.

Vanguard offers actively managed junk bond mutual funds through Wellington Management Co. But Davis said the company is not sure if it can create a passive fund that can match an index’s returns given the considerable difference in risk between various high-yield corporate bonds.

Since passive bond funds generally do not exactly replicate their index’s holdings, choosing which bonds to buy requires considerable credit analysis, he noted.

Vanguard, which deals primarily in investment-grade bonds, is second behind BlackRock Inc (BLK.N) in ETF assets globally, with $479 billion in assets, according to Lipper.

Davis said his concerns about starting a junk-bond ETF have nothing to do with the nature of ETFs, but rather the ability of large index funds to trade in an illiquid junk bond market.

Index-based junk-bond funds, including exchange-traded funds, have brought in $12 billion in new cash since the end of 2010, according to Lipper, and have become popular trading vehicles. Junk bond index funds are responsible for a total of$250 billion in assets in the United States, Lipper said.

Vanguard, based in Valley Forge, Pennsylvania, is known for its conservative stance in developing new products.

High-yield ETFs have drawn increased scrutiny this year, including a public debate in July between billionaire activist investor Carl Icahn and BlackRock Chief Executive Larry Fink, who backs the largest such fund, iShares iBoxx $ High Yield Corporate Bond Fund (HYG.P).

Icahn and others have said the funds could be disproportionately hurt by a selloff while others have criticized the funds as underperforming their benchmark.

BlackRock and some industry observers have described those concerns as misplaced, saying ETFs add transparency to the market.

Follow Reuters Summits on Twitter @Reuters_Summits

Reporting by Trevor Hunnicutt; Editing by Richard Chang

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