A stressed market can be defined as a market environment where there are more sellers than buyers, and prices decline sharply. Bond ETFs have weathered many stressed markets, including the credit crisis (2008), the European sovereign debt crisis (2010), the U.S. Treasury downgrade (2011), the Taper Tantrum (2013) and oil selloff (2014).
Here’s how bond ETFs behaved during each of these events:
Increased volumes: The trading volume on exchange for many bond ETFs actually increased, as more investors turned to ETFs when it became difficult to transact in the bond market. For example, in April 2013, the month preceding the Taper Tantrum, the average daily volume for the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) was approximately $283 million. During the Taper Tantrum period covering May 1, 2013 - July 5, 2013, average daily volume soared to $538 million as many investors were moving out of the high yield market (Sources: BlackRock and Bloomberg).
No forced selling: Even when ETF shares are redeemed, the ETF is not a forced seller, as might be the case with a mutual fund seeing heavy redemptions. As mentioned above, certain brokers – at their discretion – can exchange ETF shares for bonds. The ETF itself does not need to sell bonds in order to fund redemptions.
Discounts to NAV:In a market with declining prices, the ETF may trade at a discount (below) its net asset value (NAV), as investors seek prices for the underlying bonds. The discount is a reflection of the challenges of trading in the traditional markets versus the ease—and transparency—of trading ETFs. Thus, in a declining market the bond ETF can often fall in price first, and the NAV will follow as bond trades occur.