Behold! One More Way ETFs Are Distorting Markets

Behold! One More Way ETFs Are Distorting Markets

If you follow trends in markets, you probably already knew (or at least surmised) that HY ETFs are having observable effects on the junk bond market. It's not entirely clear that's a good thing. As we've gone to great pains to explain, an ETF can't be more liquid than the underlying assets and as Howard Marks wrote with regard to junk bond ETFs, "we know the underlying can become highly illiquid." One important think to note about that assessment is that the more trading in the ETF replaces t
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One thought on “Behold! One More Way ETFs Are Distorting Markets

  1. I spent 40 years as a college professor, 15 mostly in finance and 35 (there was overlap) in strategic management. I quit finance because the research got ridiculous ( a fact finally recognized by the keynoter at the latest AFSA meeting). However, with you around I could have found the guts of two or three good new papers every day. Your stuff is so much fun! All that great info you see every day; it’s like candy. It got me thinking about large versus small structures. If ETFs, and their competitors in the open-ended fund space, all have to own the bonds in the index and there are maybe 30 or 40 such funds in a given subspace like HY, and they are popular with investors ==> much inflow of capital, it would seem that it wouldn’t take long to run out of the bonds in the index, leading to many of the funds having to close. That would seem to imply that only large issues from big firms would do for such an index if the expectation is that a number of passive funds would attach themselves to that index. Instant liquidity problem in the making. I can see three or four good papers here. If only I had the data and the energy (the latter probably a problem of low-T).

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