Euro High Yield ETFs. May A report from CreditSights. Euro High Yield ETF report 1

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1 Euro High Yield ETFs May 216 A report from CreditSights Euro High Yield ETF report 1

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3 Contents Euro high yield ETFs in the context of high yield volatility 1 Background 2 How fixed income ETFs work 3 Exchange trading 4 Creation and redemption process 5 ETF price versus quoted NAV 7 How liquid are ETFs? 8 Management fees and tracking error 9 Worries about flows 1 Growing assets while the Street is shrinking trading 11 Tactical allocation 12 Conclusion 13

4 Euro high yield ETFs in the context of high yield volatility High yield volatility in late 215 and early 216 reignited investor complaints about illiquidity in secondary market trading. At the same time, highprofile US high yield fund closures prompted concerns about fund outflows and the ability of banks trading desks to handle such flows. These concerns invariably raise questions about ETFs and whether they contribute to flow volatility. Since mid-february risk appetite has recovered strongly as commodity prices have rallied, the ECB has announced a range of new policy initiatives (including corporate bond purchases) and the Fed has sounded a less hawkish tone on rate hikes. On the back of that, euro high yield ETFs have seen record inflow for a four-week period of nearly 96 mn to March 23, according to JPMorgan fund flow data, and high yield mutual funds have also seen strong inflows, but not record setting. That has eased worries about both trading liquidity and fund redemptions, but such anxieties will invariably return. With high yield ETFs share of assets under management continuing to grow, fears of how those ETF flows affect prices and trading conditions are likely to be renewed. In the context of that high yield volatility and fund flows (both outflows and inflows), we have conducted an analysis of euro high yield ETFs. Our analysis focused on cash-based physical euro high yield ETFs; how they have performed in recent volatility, including: l the ability of holders to trade ETFs in periods of market sell-offs, l the relationship between the traded price and the quoted net asset value of the underlying assets, l and any impact on wider credit pricing from ETF outflows. We also conducted interviews with credit investors on their use and perception of ETFs in general, and on euro high yield ETFs in particular. Among credit investors, usage appears to be still limited. However, for the investors that we spoke to who do use ETFs, they see the instruments as a means of taking or reducing exposure to a broad-based universe of credit either to tactically allocate to an asset class or to retain some element of liquidity within the portfolio, although the two are not clearly separate. l Tactical allocation to take a directional view on an asset class, including an asset class outside of the manager s core remit. l Liquidity when fund managers have to put large inflows to work quickly or need to meet a large fund redemption. For an account worried about redemptions, an ETF allows the fund manager to liquidate part of the portfolio without creating tracking errors or distortions from selling the largest, most liquid bonds or sitting on a large cash position. Investors that we interviewed who are not using ETFs cited limited familiarity or said they had not had problems with trading liquidity in euro high yield bonds. Finally, ETFs also charge a management fee. So, while the cost of trading an ETF may be competitive versus the transaction cost of trading each of the underlying line items, for buy and hold investors or long term holders the management fee may outweigh the benefits of lower transaction costs. 1

5 Background ETFs are effectively mutual funds in which the fund s shares are listed on a stock exchange. That allows funds to be bought and sold on the exchange as an initial mechanism for matching buyers and sellers. However unlike mutual funds, ETFs settle creations or redemptions via a third party by accepting or handing over the underlying assets. The third party will try to source or sell those assets in the secondary market. The ability of third parties to create and redeem ETF shares minimises the discrepancy between the ETF exchange traded price and the value of the underlying assets. Fixed income ETFs are very much the late developer in the ETF space. The first European fixed income ETF was launched in 23. There are now at least 17 ETFs that track euro investment grade cash bonds, including strategies such as short-duration, crossover-focus and actively managed ETFs. There are other ETFs that allow holders to take exposure to euro credit as part of a wider global bond mandate or do so using derivatives: both total return swaps and CDS indices. In this report we focus on cash-based physical ETFs only (see table). The three euro high yield cash bond ETFs have roughly 5.8 bn in assets under management, as of the end of April, representing roughly 1.9% of the total euro high yield index (based on BAML numbers). The proportion of the euro HY index held by HY ETFs is slightly greater than in the investment grade space; IG ETFs have assets under management of 19.7 bn as of March 31, representing 1.1% of the BAML Investment Grade Index (see chart 1). Euro HY physical ETFs launch date and size as of April 3, 216 ETF Ticker Provider Launch date Launch size ( mn) ishares Markit iboxx Euro High Yield UCITS ETF IHYG BlackRock Sep ,54 SPDR Barclays Capital Euro High Yield UCITS ETF SYBJ State Street Mar ishares Euro Corporate Bond BB-B UCITS ETF BBEB BlackRock Jan Source: CreditSights, BlackRock, State Street Current size ( mn) 1. Euro Fixed Income Corporate ETF Universe Assets Under Management ( bn) AUM as % of BAML indices 3 25 HY IG 2.% 1.8% 1.6% HY IG 2 1.4% 1.2% 15 1.% 1.8%.6% 5.4%.2% % Source: CreditSights, Fund Reports, Bloomberg, BAML indices (ER, HE) 12

6 How fixed income ETFs work Before looking at the performance of euro high yield ETFs during recent periods of volatility, it is helpful to understand the trade process of fixed income ETF shares and how inflows (creations) and outflows (redemptions) are handled. Authorised participants vs market makers At the centre of any ETF transaction are market makers and authorised participants (APs). Not all ETF market makers are authorised participants and not all authorised participants are market makers. The market makers and authorised participants can be both the existing broker dealers as well as non-bank trading houses such as Bluefin, Flow Traders, Goldenberg, Jane Street, and SIG Susquehanna, among others. The majority of on-exchange market makers are non-bank trading firms. Market makers play a role in the secondary market trading of the ETF shares on the stock exchange. They are approved by the stock exchanges where the ETF is listed and are required to enter two-way prices with a maximum bid-ask spread and a minimum quote size in the same way as listed equity. The LSE s Market Maker Obligations stipulate that the maximum bid-ask spread on, for example, the ishares Markit iboxx Euro High Yield UCITS ETF (IHYG) is 1.5%. The LSE s maximum spread (there are three bands: 1.5%, 3% or 5%) depends on the underlying assets, whether the fund is managed, and whether the ETF is traded in more than one currency. In Europe, each ETF is listed on numerous exchanges in the different countries. Authorised participants are approved by ETF providers to interact with the ETF to create and redeem shares. Primary market creations (or redemptions) are normally the result of the AP delivering (or taking receipt of) a basket of bonds in exchange for the ETF. The AP receives ETF shares based on the valuation of the bonds as determined by the benchmark index price that evening. Settlement is normally T+2 settlement cycle. 13

7 Exchange trading Sales by ETF holders can be matched with buyer demand via the exchange or met using the redemption process. The majority of flows appear to be settled in this way via the exchange rather than by creating or destroying shares. Chart 2 shows the estimated daily net flow into or out of euro high yield ETFs against the volume traded (on the LSE). Periods in which euro high yield ETFs have seen large inflows have been characterised by higher trading volumes, suggesting that turnover is both being settled by APs creating and redeeming shares, and also by shares being traded in the secondary market. The flow numbers on the chart might understate the true extent of flows since they use the daily change in number of shares outstanding. If a redemption and a creation occur on the same day they will partially cancel each other out and so wouldn t show up in this estimate. To ETF providers, on average 8% to 85% of trading in ETFs goes via the exchange, and the remaining 15% to 2% is settled by authorised participants swapping bonds for ETF shares. 2. Euro HY Fixed Income ETF Daily Flows & Trading Volumes (3-month daily average, mn) Estimated flows -15 Jan 213 Jan 214 Jan 215 Jan 216 Source: CreditSights, Fund Reports, Bloomberg Volume traded

8 Creation and redemption process In a seller s market it may not be possible to match an ETF seller with a buy order. Market makers must still offer two-way pricing according to stock exchange rules. In that case an authorised participant will offer a price that it thinks reflects where it will be able to clear the bonds. If the bond market doesn t see a concomitant sell-off, then the difference between the price paid for the ETF share (and converted into bonds) will be retained by the AP. The AP assumes the risk of not clearing those bonds for more than they have bought them. An authorised participant is unlikely to need to deliver every single bond to the ETF provider to create those new shares. Instead an ETF provider provides a list of bonds that it will accept in exchange for delivering newly issued ETF shares: the creation basket. For example, at month-start the creation basket might include a newly issued bond that will enter the index for the month-end rebalancing. The ETF provider publishes a list of bonds that it will deliver in exchange for ETF shares: the redemption basket. For example the redemption basket might include a bond that the fund is overweight, or that is no longer in the reference benchmark. The creation and redemption baskets change over time depending on what bonds the ETF needs in order to best replicate the benchmark. Note that the published creation basket is not definitive. APs can approach the provider with a basket of bonds that the ETF provider may accept as long as they are not expected to create a large tracking error versus the reference benchmark. The APs have access to the index and the current holdings, so a part of their insight is to understand the make-up of the baskets that will be acceptable to the ETF provider. The ETF fund manager will quantitatively assess if that basket is expected to have a sufficiently close tracking error to the underlying index before accepting it. According to ETF providers, that is how the majority of creations are done in their euro fixed income ETFs. The creation and redemption process allows the ETF to externalise cost and reduce transaction costs within the fund as much as possible and primarily reduce tracking error as much as possible. A mutual fund may need to sell more liquid instruments to meet redemptions. In that case, redemptions can lead to a mutual fund s assets deviating from the benchmark or from the manager s intended strategy. The ETF s focus on minimising tracking error with the redemption basket greatly reduces that last-investor-left risk associated with mutual funds. Some ETFs will provide cash redemptions, but the larger APs in euro fixed income ETFs tend to prefer payment in kind. This allows them to exploit their expertise in redeploying the constituents into new ETF creation baskets or laying the line items off into the market via the broker dealers or directly 3. ETF Trading and Redemption Process Option 1: sell the ETF share to another investor buyer (collect bid-ask spread) Investor ETF share Option 2: redeem the ETF with the provider and receive the underlying bonds Investor ETF share Market maker / Authorised Participant (AP) ETF share ETF provider ETF share Receives bonds (selection of bonds currently making up Redemption basket) Option 3: sit on the ETF in expectation of market improvement Source: CreditSights 15

9 to the buy side. ETF providers also tend to prefer payment in kind since they can use the in-kind creation/redemption process as much as possible as a means of rebalancing their portfolio. While in most cases the AP will either deliver or receive the bonds for primary market transactions, on occasions the AP can make use of the execution desk of the fund manager of the ETF. The AP makes money by trading the ETF shares and by acquiring bonds (both by buying them in the market and via other ETF redemptions) and swapping them to the ETF provider for shares at the index-published value. The ETF will always pay index closing price for the bonds. What the AP has paid is of no concern to the ETF. This arguably makes the process somewhat more collaborative or possibly reduces scope for conflict than the traditional buy-side and sell-side setup. There are, therefore, three means by which enddemand for and supply of ETFs can be resolved. As chart 3 shows, the first mechanism is via an on-exchange trade or in the OTC market, the second is via the creation or redemption of ETF shares and the third is that authorised participants do not have to sell every bond in a redemption basket. They can sit on bonds, use them as inventory to create other ETFs or in their normal course of bond business. 16

10 ETF price versus quoted NAV The incentive for APs to buy shares in the ETF and swap them for bonds, or buy bonds and swap them for shares, is partly the difference between the exchange-traded price of the ETF and the value of the underlying instruments, implied by the net asset value of the ETF: the premium or discount. As discussed earlier, when an AP buys shares without having a matching buyer, it can either sit on the shares or swap them for bonds (in blocks of a certain number of shares). That transaction is conducted after market close, with the bonds value dictated by the index pricing. Trades conducted outside of market hours, when the price of the bonds is theoretically known, are referred to as at NAV. But there is no guarantee that last night s index pricing accurately represents the price the AP can sell the bonds for the following day. So if markets are expected to open weak versus the index close, then the AP will look to protect against that weakness by bidding at below the NAV. Even so, the divergence in NAV and exchange price is small. As chart 4 shows, that difference between end of trade share price and index value rarely exceeds 1% in either direction. The premium or 4. Difference Between Last Exchange Trade Price & NAV Quoted by Benchmark Index of Euro HY ETFs (%) 2.% 1.6% 1.2%.8%.4%.% -.4% -.8% -1.2% ishares Markit iboxx Euro High Yield UCITS ETF SPDR Barclays Capital Euro High Yield UCITS ETF -1.6% Source: CreditSights, Fund Reports, Bloomberg discount to NAV on the ishares Markit iboxx Euro High Yield UCITS ETF has been greater than 1% on only 11 days since the end of 212 (1.4% of trading days). For the SPDR Barclays Euro High Yield Bond UCITS ETF (SYBJ) the premium or discount has exceeded 1% only 27 times, or 3.4% of trading days, despite only launching in February

11 How liquid are ETFs? The question of whether ETFs can be more liquid than the underlying market has come up repeatedly in our conversations with clients. When trading flows are two-way, there seems little doubt that ETFs allow a means of trading a diversified exposure to euro credit at lower cost than trading each of the underlying instruments. As chart 5 shows, the cost of trading euro high yield bonds is sharply higher than euro high yield ETFs. The chart uses 1 randomly selected euro high yield bonds and takes the weighted average bid and bid-ask spread on those bonds, to try and get a rough average of the cost of trading euro high yield over that period. It charts that bond-average bid-ask spread against the LSE published trade-volume weighted bid-ask spread for the ishares Markit iboxx Euro High Yield UCITS ETF. The data covers the days before and after the gating of the US high yield mutual fund Third Avenue. Over that period the bid-ask spread on the ETF fluctuated around the 2 bp range, versus closer to 1 bp for most of the period on euro high yield bonds. As chart 6 suggests, the bid-ask spread of the ishares Markit iboxx Euro High Yield UCITS ETF has tended to be higher in periods of rising index spreads. The fall in ETF bid-ask spread between 212 and 214 also coincided with an expansion in the assets under management of the ishares Markit iboxx Euro High Yield UCITS ETF from 835 mn at the end of 211 to 2.6 bn by the end of 214. As of end-july 212 the fund s assets were 1 bn, and an average of 37 mn of the ETF was traded on the London Stock Exchange per day over the month. By July 213 the assets had risen to 1.9 bn, and average daily trading was nearly 1 mn. As of end-january 216, the fund had grown to 3.8 bn, and average daily trading on the LSE listing was 39 mn per day. In the 212 to 214 period there were two large spikes in the average trading cost: in July 212, at the height of the sovereign crisis, and in July 213, during the US Taper Tantrum. And since the middle of 214, the average bid-ask has risen from around 1 bp to between 15 bp and 25 bp despite AUM remaining at over 3. bn. While the cost of trading an ETF s shares typically declines as the assets under management increase, the bid-ask spread still tends to be higher when there is volatility in the underlying assets. That rise in the cost of trading ETFs has coincided with a rise in the average cost of trading in high yield. Chart 7 shows newly issued double-b rated non-financial high yield bonds in the BAML index. 5. Bid-Ask Quoted Price on ishares Markit iboxx Euro High Yield UCITS ETF vs Weighted-Av Difference between Bid-Ask Quoted Price on Underlying Bonds (bp) ETF HY Bonds December 215 * weighted by market value, uses random selection of 1 index included bonds Source: MarketAxess TRAX, Bloomberg, CreditSights 6. Index Spread vs Average Bid-Ask Spread on ETFs (5-day centred av) Jan'12 Jun'12 Nov'12 Apr'13 Sep'13 Feb'14 Jul'14 Dec'14 May'15 Oct'15 Source: CreditSights, Bloomberg Index spread Bid ask spread 7. Median Bid Ask Spread on Large (>= 5 mn) & Small Pure* HY Bonds (<= 3 mn) (issued since 213) Quoted Ask Price less Quoted Bid Price Small bonds Large bonds. Sep'14 Dec'14 Mar'15 Jun'15 Sep'15 Dec'15 Mar'16 * pure HY = developed markets ex-hybrids, financials and fallen angels Source: CreditSights, Bloomberg The average quoted bid-ask spread on those bonds has been volatile, but it has also been consistently higher than on the ETF and it has been rising too

12 Management fees and tracking error While trading costs in ETFs are low versus the underlying bonds, for investors looking to invest in euro high yield credit for a prolonged period there is the question of management fees. Those fees vary, with high yield ETFs generally commanding larger fees than investment grade ETFs. The largest euro high yield ETF, the ishares Markit iboxx Euro High Yield UCITS ETF, charges a management fee of 5 bp. The indices which the euro high yield ETFs track tend to be the liquid versions of the larger high yield indices, which only include bonds above a certain denomination. In the case of the ishares Markit iboxx Euro High Yield UCITS ETF, it tracks the Markit iboxx EUR Liquid High Yield Index which only includes bonds that are over 25 mn in size, and newly added bonds must have years to maturity. There are also issuer and country weight caps of 3% and 2% respectively. Performance relative to benchmark has been very close. For the five full calendar years since the ishares Markit iboxx Euro High Yield UCITS ETF was launched, tracking difference versus the index has fluctuated between 2 bp to 35 bp of the return on the benchmark for each of those years. In other words, while the ETF charges 5 bp in management fees, the tracking difference versus the index is closer to only 3 bp a year. According to providers, that outperformance (before accounting for the management fee) reflects a mix of sampling strategy and securities lending revenue. That means that ETFs could be cheaper over shorter holding periods than holding cash bonds for investors who do not intend to hold to maturity. Given a roughly 8 bp difference in the cost of transacting in the underlying euro high yield bonds versus the average euro high yield ETF bid-ask spread, a 2 bp to 4 bp tracking difference by the ishares Markit iboxx Euro High Yield UCITS ETF versus the benchmark index would imply that for investors looking to hold the portfolio for less than two to four years (8 bp divided by the tracking difference) the ETF would be worth considering as a cheaper way to transact for investors who do not need to take single-name exposure. 8. Total Return Performance on ishares Markit iboxx Euro High Yield UCITS ETF vs Benchmark Index Total Return Performance Since Inception Annual Difference vs Benchmark ishares Euro HY UCITS ETF Markit iboxx Euro Liquid High Yield % -.5% -.1% -.15% -.2% -.25% -.3% -.35% -.4% Source: ishares, Markit, CreditSights 19

13 Worries about flows Could the volatility of flows into and out of ETFs be creating the kind of one-way markets that mean selling bonds is difficult? The left hand side of chart 9 suggests that during 215, IG ETFs tended to see outflows coinciding with spread widening, and the period of tightening spreads through 214 saw large fund inflows. The right hand side of chart 9 similarly shows that euro high yield ETF outflows in the second halves of 214 and 215 and in the early part of this year coincided with periods of sharp widening in spreads. In contrast to IG ETFs, HY ETFs tended to see large inflows in early and late 215 on the back of spreads having widened and starting to turn. What impact those flows have on credit pricing is hard to say. Average daily net flows into or out of euro corporate fixed income ETFs are still small as a percentage of the total euro index. The largest one-week inflow into the ishares Markit iboxx Euro High Yield UCITS ETF and SPDR Barclays Euro High Yield Bond UCITS ETF combined since 213 was in early-march 215 and was equivalent to 1% of AUM (or.14% of the total BAML index market value). The largest one-week outflow was in mid-june 213 representing 9% of AUM or.7% of the total index. Additionally, the monthly size and direction of the ishares Markit iboxx Euro High Yield UCITS ETF s tracking error against the benchmark index shows little relationship to the performance of the overall benchmark index, as chart 1 shows. That suggests that the funds performance relative to benchmark has not been undermined by any outflows related to wider credit market sell-offs. 9. Euro Fixed Income Corporate ETF Daily Flows (1-mth daily av, mn) vs Index Spreads (1-mth daily av) IG Index Spreads vs IG Corporate ETF Flows HY Index Spreads vs HY Corporate ETF Flows 12 9 Estimated flows Index spreads Estimated flows Index spreads Source: CreditSights, BAML index data, Fund Reports, Bloomberg 1. ishares Markit iboxx Euro High Yield UCITS ETF Tracking Error vs Total Index Return (Mthly).1% Monthly Difference vs Benchmark Monthly Total Return 3% 2%.5% 1%.% % -1% -.5% -2% -.1% % Source: BlackRock, Markit, BAML index data, CreditSights 1

14 Growing assets while the Street is shrinking trading Chart 11 is frequently highlighted as evidence of the increasing risk of a market breakdown if funds try to exit credit at the same time. That divergence is certainly a justified concern. But adding ETFs to the growth in assets under management ignores the apparatus that continues to evolve around trading in fixed income ETFs. While the intermediation process that underlies traditional trading in corporate bonds is generally agreed to have diminished since 28, in the wake of the financial crisis, an apparatus has been evolving around fixed income ETFs that enables the orderly settlement of those flows, the APs. In fixed income, some of those APs are not banks or broker dealers, but are specialist ETF trading firms or have evolved from other origins. That is partly because ETFs have tended to be traded by banks on their equity delta one desks. But equity trading desks have historically had little expertise in trading the bonds and frequently do not interact with the bond trading desks. Some banks do now trade ETFs on their fixed income desks, but often will not want to trade bonds directly with other banks. As a result, the majority of euro fixed income primary market trading is handled by non-bank APs. 11. US Corp Bond Mutual Fund & ETF AUM vs Primary Dealers Inventories in Corporate Bonds ($ bn) 2,5 2, 1,5 1, 5 Mutual funds + ETF Mutual funds Primary Dealer Inventories - RHS The APs expertise lies in sourcing the securities needed for creation baskets and placing securities obtained from redemption baskets. That sourcing/placing process can mean using them in new creation baskets, selling the bonds to the broker dealers and selling them directly to the buy-side. Of those ETF APs named above, we understand that Flow Traders is the smallest in terms of trading volumes. But it is listed following a partial IPO in July 215 and has published financial accounts for 1H15 and 2H14. Over that six-month period the value of traded assets held by Flow Traders, at period end, increased 13% from 2.8 bn to 3.2 bn, and the firm s trading receivables grew nearly fivefold from 5 mn to 2.43 bn. In contrast, over the same period, Deutsche Bank s trading assets increased from 196 bn to 26 bn (+5%). Deutsche Bank s trading portfolio is of course much larger and more diversified, but because of regulatory pressures, banks trading books are generally shrinking or showing only low growth. In the same way that banks trading operations create risks, APs are potentially at risk if they are unable to lay off positions in a timely and priceeffective manner. However, from the regulators perspective, non-broker APs lack of the use of derivatives and their lack of deposits makes them much less systemically important than the big banks. In other words, despite worries about the shrinking ability to exit bond positions coinciding with growing mutual fund and ETF AUM, those worries tend to ignore the parallel trading operations that are growing to handle ETF flows. What s more, while regulators have been actively reducing the role of banks in providing liquidity in secondary markets, the growth of authorised participants is arguably less of a concern for regulators. Traditional sell-side banks are now also increasing their activity as ETF authorised participants rather than exclusively as exchange market makers. In some cases, that is seeing the desk that trades the underlying asset class, namely credit, trading ETFs of the same asset, rather than all ETFs trading on the equity desk. Source: NY Fed, ICI, Bloomberg, CreditSights 11

15 Tactical allocation In the flows section we noted a tendency for euro high yield ETFs to see inflows as spreads widen. That use of those ETFs as a means of taking exposure quickly appears to be supported by the reported numbers of institutional investors holdings. The majority of those institutional accounts are discretionary wealth management funds or multi-asset funds and the percentage of euro ETFs held by institutions is very much countercyclical. As chart 12 shows, institutional investors participation in euro high yield ETFs has tended to increase suggesting that they are increasing their holdings in response to perceived better valuations. Interestingly, euro IG ETFs do not appear to be used by institutional investors in the same way. There has been a general rise in institutional holdings of investment grade euro ETFs since the middle of 214. That has coincided with the start of the downturn in oil prices and the widening in credit spreads, especially in commodity sectors. 12. Index Spread (bp) vs % of ETF Shares Held by Institutional Investors IG Index Spreads vs IG Corporate ETF Flows HY Index Spreads vs HY Corporate ETF Flows Spread % held by institutions 25% 2% 15% Spread % held by institutions 3% 25% 2% % % 5% % 5% Jan'12 Jan'13 Jan'14 Jan'15 Jan'16 % Jan'12 Jan'13 Jan'14 Jan'15 Jan'16 % Source: CreditSights, Bloomberg 12

16 Conclusion The price that the ETF shares traded on the exchange rarely diverged by much or for long from the index provider s NAV for the underlying, and we haven t found any evidence holders have struggled to transact during times of market stress. Indeed those periods have seen both higher exchange trading volumes and greater flows. It is, however, true that bid-ask spreads have tended to rise in periods of market stress, although the bidask spreads even in those periods are still considerably lower than the average bid-ask spread on euro high yield bonds. Despite concerns about ETFs exacerbating secondary market volatility as larger daily flows put additional strain on considerably reduced bank trading desks, there is little evidence of that being the case. It is possible that the redemption- creation mechanism by which ETF flows are handled and the growth in the non-bank authorised participant trading process may have reduced some of the pressure from those flows. For the moment, the primary reason for using euro high yield ETFs appears to be as a means of quickly taking exposure to the asset class as valuations become more compelling. However, some accounts that we spoke with did also cite the ability to put inflows to work quickly, before buying the underlying securities, as a reason for using ETFs. Finally, ETFs also charge a management fee. So, while the cost of trading an ETF may be competitive versus the transaction cost of trading each of the underlying line items over longer holding periods (2 3years+) the management fee may outweigh the benefits of lower transaction costs. The report, the information in it, and the excerpts thereof (the Report ) are the property of CreditSights, Ltd and the Report s use is always subject to certain contractual limitations to which CreditSights is a party (the Agreement ), the consent of CreditSights (the Agreement ) and the terms of the Risk Warning set out below. This Report is for use exclusively by certain professional investment personnel only (collectively referred to herein as Licensed Professional Users ). The Report must not be reviewed, accessed, processed, used, stored, reproduced, abstracted or transmitted in whole or part in any way except pursuant to the terms of the Agreement. Please do not read or use this Report at all unless you are a Licensed Professional User. Risk Warning: The Report is for Licensed Professional Users only and no-one else; in particular the Report is not intended for use by retail customers of any kind including Private Customers (as defined in the UK by the FCA). The Report is made available to Licensed Professional Users on an As Is and As Available basis and is intended for general information purposes only. The Report may not be accurate, complete or up to date. The Report does not constitute an invitation to invest in shares or constitute or form a part of any offer for the sale or subscription of, or any invitation to offer to buy or subscribe for, any shares, securities or other financial instruments of any kind ( Investments ). No action should be taken or omitted to be taken in reliance on the Report or any part of it nor should the Report or any part of it form the basis of, or be relied upon in any connection with any contract or commitment whatsoever. The Report is not advice of any kind or a personal recommendation and is not to be relied upon as the basis for any investment decisions. The price of Investments and the income derived from them, can go down as well as up and may even fall sharply. You should take independent expert advice before making any investment decisions. If you are not a Licensed Professional User and you use the Report or any part of it: (i) you are using the Report in breach of CreditSights rights and CreditSights reserves any and all rights it may have against you; (ii) CreditSights give no representation, warranty or other assurance of any kind as to the suitability, accuracy or fitness for purpose of this Report or any part of it; and (iii) you do so entirely at your own risk and CreditSights shall be under no liability whatsoever in respect thereof. All rights reserved. The information in this report has been obtained from sources believed to be reliable; however, neither its accuracy, nor completeness, nor the opinions based thereon are guaranteed. If you have any questions regarding the contents of this report contact CreditSights at legal@creditsights.com. CreditSights Risk Products and related information are provided by CreditSights Analytics, LLC. CreditSights Limited is authorised and regulated by the Financial Conduct Authority (FCA). Certain data appearing herein is owned by, and used under license from, certain third parties. Please see Legal Notices for important information and limitations regarding such data. For CreditSights terms of use, please see Terms & Conditions. 13