Given the recent volatility in high yield markets, we thought it would be useful to examine how the market has evolved since the 2008 financial crisis. Specifically, we will explore three major developments in the high yield market since the global financial crisis: 1) the role of Exchanged Traded Funds (ETFs), 2) trading/liquidity influences, and 3) the changing high yield investor base.
I. The Role Of High Yield Exchanged Traded Funds
There has been a lot of media attention regarding ETFs and their impact on fund flows. How big has the impact been? We will answer this question by examining high yield ETFs within the context of the overall high yield market and then evaluate how it has changed since the 2008 financial crisis.
Total high yield ETF assets under management (AUM) have grown over the past several years. At the end of 2008, high yield ETFs AUM were $2.4B. By the end of 2013, 27 different high yield ETFs accounted for roughly $35B in assets with nearly all those assets in USD denominated and US domiciled issuers. The estimated size of this market is $1.3T; high yield ETFs AUM represent only 3% of this market, up from 0.3% in 2008.
The increased prominence of high yield ETFs has influenced trading considerably. ETF Bid-Wanted lists (a list of bonds that ETFs are trying to sell) and ETF Offer-Wanted lists (a list of bonds that ETFs are trying to buy) are attention grabbing because they can be sizeable and are broadcast multiple times throughout the day. However, ETF trading volume as a percentage of total estimated high yield trading is relatively small.
There is not a precise way to calculate total ETF trading activity, but Citigroup’s high yield strategist estimated that ETF high yield average daily trading volume represented roughly 2.3% of total average daily Trade Reporting and Compliance Engine (TRACE) volume in 2013. This is up from less than 1% in 2009. Because ETF volume is driven by flows into/out of the funds, trading volume can change significantly from one day to the next. For example, daily ETF trading volume as a percentage of total daily TRACE volume ranged from 0.6% to 5.1% in 2013 depending on the day as shown in Chart I.
