High yield ETFs give investors a liquidity illusion, UBP warns

High yield ETFs are attracting unprecedented inflows from institutional investors, seeking a liquid exposure to high yield markets, according to Swiss bank Union Bancaire Privée (UBP).

As of the end of May, the two largest funds, $13.6bn IShares IBoxx high yield and $10bn SPDR Barclays Capital high yield, increased by $9bn and $6bn respectively over the last 24 months.

But high yield ETFs give investors the illusion of greater liquidity when, in truth, they are investing in high-yield bonds, UBP warned.

“The high yield ETF liquidity reputation is much overdone as the ETFs are invested in high yield cash bonds. The liquidity of high yield cash bonds have been suffering since 2007 from a drastic reduction of dealers and banks’ inventories on their books on the back of the new regulatory requirements, causing liquidity to shrink and trading costs to rise,” said Olivier Debat (pictured), product specialist at UBP.

In the current market environment, UBP offers liquid exposure to high yield in all market conditions through its UBAM global high yield solution fund.

“The fund is exposed to high yield spreads through high yield CDS indices: CDX NA HY index for the US and iTraxx Europe Crossover for Europe. This enables the fund to maintain high liquidity in all market conditions and offer a better liquidity than high yield cash bond products,” Debat said.

He added: “Measured in terms of turnover, the high-yield CDS market is over ten times more liquid than the high-yield bond market.”

UBAM global high yield has a five-year exposure to high yield spreads and a limited 1.5 year exposure to interest rate. It is a global high yield fund. The USA account for 67% of the exposure and Europe accounts for 33%.

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