Fixed Income: Liquidity Risks & Unique Opportunities. Spencer Bogart ETF Specialist

Transcription

1 Fixed Income: Liquidity Risks & Unique Opportunities Spencer Bogart ETF Specialist ETF.com

2 Agenda & Takeaways Bond ETFs: Exposing Fixed Income Opportunities Takeaway: ETF opportunities to tailor your client s bond exposure Challenges of the Bond Market Takeaway: Determining the value of a bond at a point in time is difficult Bond Indices Takeaway: Strengths and weaknesses of bond indices. Tracking Bond Indices Takeaway: How to evaluate the real-world holding costs of a bond ETF Liquidity Challenges Takeaway: ETFs can be more liquid than their underlying market Premiums/Discounts in Bond ETFs Takeaway: Bond ETFs can be price discovery vehicles

3 ETFs: Exposing Fixed Income Opportunities

4 The Typical 60/40 View Bonds Large-Cap Stocks Mid-Cap Small-Cap Growth EM Mkts Intl. Value

5 The Real View Sovereigns Covered Bonds Zero Coupon Large-Cap Mid-Cap Inflation-Protected Small-Cap ABS Growth Investment Grade Corporate High Yield Corporate EM Mkts Intl. Value

6 Periodic Table of Bond Returns Leveraged Loans 5.69% Municipals 3.51% ABS 3.47% Treasuries 2.79% High Yield 11.85% Leveraged Loans 7.33% ABS 5.78% MBS 5.22% Treasuries 9.01% MBS 6.90% CMBS 4.60% IG Corporates 4.56% Treasuries 13.74% MBS 8.34% Municipals -2.47% IG Corporates -4.94% ABS % High Yield 58.21% Leveraged Loans 44.86% CMBS 28.14% CMBS 20.81% High Yield 15.12% Leveraged Loans 9.97% IG Corporates 9.00% Municipals 10.69% Treasuries 9.81% IG Corporates 8.15% CMBS 6.47% High Yield 15.81% CMBS 10.04% IG Corporates 9.82% Leveraged Loans 9.42% High Yield 2.74% CMBS 4.91% Municipals 3.36% CMBS % IG Corporates 18.68% Treasuries 5.87% MBS 6.23% Municipals 6.78% MBS 2.61% CMBS 1.83% Municipals 4.84% IG Corporates 4.30% Leveraged Loans 1.88% High Yield 1.87% High Yield % Leveraged Loans % Municipals 12.91% MBS 5.89% MBS 5.37% ABS 5.21% High Yield 4.98% Leveraged Loans 1.82% MBS 2.59% Treasuries 1.99% IG Corporates 1.68% Treasuries 3.08% ABS 0.75% ABS % Treasuries -3.57% Municipals 2.38% ABS -1.37% ABS 0.67%

7 Diversification In Fixed Income There are many ways to diversify fixed income exposure

8 Opportunities Abound 239 Sovereign Bond ETFs 40 Investment Grade Corporate Bond ETFs 17 Broad Market Investment Grade Bond ETFs 11 High Yield Corporate Bond ETFs 10 Inflation-linked Bond ETFs 9 Covered Bond ETFs 6 Broad Market Bond ETFs

9 The Bond Market

10 Bond or Bond Fund?

11 ETFs: Improving Bond Investing Fixed Income markets Equity markets Broker A Customer A Broker B Customer B FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

12 Bond Indices: Do They Make Sense?

13 What is Plain Vanilla?

14 Do Bond Indices Make Sense?

15 Tracking Bond Indices is Hard

16 Navigating an Ocean of Bonds

17 Real Tracking Challenges: NAV vs Index Note: These are US-based ETFs.

18 Replication: Synthetic or Physical

19 Liquidity & Bond ETFs

20 Issues for Consideration - Trading Market Depth Bid/Ask Spreads Order Types

21 Layers of Fixed Income ETF Liquidity Secondary Market ADV Observable On Screen Volume ETF Market Depth MARKET MAKER INDICATIONS OF LIQUIDITY Contingent Liquidity Primary Market CREATION/REDEMPTION LIQUDITY (UNDERLYING BASKET) Underlying bond market

22 Liquidity & Spreads Most Liquid Least Liquid Sovereigns; Futures Based Strategies Inflation-Protected; Active Funds DM IG Corporates; EM Corps (USD); DM Sovereigns HY Corporates; EM Local Currency Most Liquid Least Liquid

23 Transcendent Liquidity? Secondary Market ADV Observable On Screen Volume ETF Market Depth MARKET MAKER INDICATIONS OF LIQUIDITY Contingent Liquidity Primary Market Underlying bond market

24 Primary vs. Underlying Liquidity With critical mass in exchange liquidity, large trades can be executed without activity in the underlying securities. Median Daily Ticker Name Spread (%) Volume ($M) TLT ishares Barclays 20+ Year Treasury Bond Barclays LCS Score January % $ % MBB ishares Barclays MBS Bond 0.04% $ % TIP ishares Barclays TIPS Bond 0.03% $ % EMB LQD J.P. Morgan USD Emerging Markets Bond ishares iboxx $ Investment Grade Corporate Bond 0.05% $ % 0.02% $ % JNK SPDR Barclays High Yield Bond 0.03% $ % Due to robust secondary market liquidity, investors are given access to markets at a fraction of what it would cost over the counter. Source: IndexUniverse, Barclays Capital LCS Report 2013

25 Liquidity Summary Evaluate spreads and market depth Consider ETFs for previously difficult to access segments of the bond market. Use limit orders to contain trading costs

26 Premiums, Discounts, & Bond ETFs as Price Discovery Tools

27 Premiums & Discounts IEF: 7-10 Year Treasurys Look at changes in Scale! 0.3% WIP: Int l Sovereigns 1.0% HYEM: HY EM Corps 2.5%

28 Price Discovery in Action- High Yield Do market prices lead NAV or does NAV lead market prices? FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

29 Wrapping Up 239 Sovereign Bond ETFs 40 Investment Grade Corporate Bond ETFs 17 Broad Market Investment Grade Bond ETFs 11 High Yield Corporate Bond ETFs 10 Inflation-linked Bond ETFs 9 Covered Bond ETFs 6 Broad Market Bond ETFs

30 Thank You for Your Attention

31 Fixed Income: Liquidity Risks & Unique Opportunities Spencer Bogart ETF Specialist ETF.com