Fixed Income ETFs and Bond Liquidity

Credit ETFs in Mutual Funds and Corporate Bond Liquidity

“…This occurs despite the cross‐sectional increase in liquidity that accrues to bonds included in ETFs, which has been demonstrated by other researchers (e.g. Marta (2020), Holden and Nam (2019) and Ye (2019)). The net effect of ETFs on corporate bond liquidity depends on both of these effects, and has worsened over time as the use of ETFs to manage liquidity by HY mutual funds increased.…”

“…To construct our sample of IG and HY corporate bond ETFs, we follow Dannhauser (2017) and Marta (2020) and restrict the sample of corporate bond ETFs to the 50 largest ETFs by assets under management in December 2019. ETF assets have increased by a factor of six since 2013 in both HY and IG, and at the end of 2019 reached $60bln in HY and $550bln in IG.…”

“…A number of recent studies (e.g. Marta (2020), Holden and Nam (2019), and Ye (2019), among others) have examined the implications of ETFs ownership. They generally conclude that inclusion in ETFs does confer cross‐sectional benefits to liquidity, and that spill‐overs from the create and redeem process contribute to these benefits.…”

“…We obtain the holdings of the ETFs from the CRSP Survivor‐Bias‐Free Mutual Funds database. Following Dannhauser (2017) and Marta (2020) we define ETF Inclusion of bond i , for month t as the sum its dollar value in all ETFs that own that bond, divided by the bond's amount outstanding at the end of that month: $$$$\begin{equation*}\ ETF\ Inclusio{n}_{i,t} = \frac{{Sum\ ETF\ Market\ Valu{e}_{i,t}}}{{Amount\ Outstandin{g}_{i,t}}}\ ,\% \end{equation*}$$$$…”

“…The general conclusion is that inclusion in ETFs does confer cross‐sectional benefits to liquidity (e.g. Marta (2020), Holden and Nam (2019), and Ye (2019)), and that spill‐overs from the create and redeem process or improved price discovery contribute to these benefits (e.g. Choi, Kronlund and Oh (2020); Rhodes and Mason (2022)).…”