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October set a record for U.S. bond ETF volume as investors repositioned in fast-moving markets.

Choppy financial markets in October stoked record volume in U.S. bond exchange traded funds.

The autumn trading surge reflects growing demand to use bond ETFs for help managing risk, particularly in rapidly changing conditions. Rising volumes also show that investors continue to adopt ETFs as tools for timely, efficient access to the bond market.

Including all U.S.-listed ETFs from every issuer, exchange volumes in bond ETFs last month jumped to $245 billion, averaging $11.2 billion per day on average.1 October’s bond ETF trading volume nearly doubled from the same month a year earlier, and was 16% higher than the previous monthly record, $212 billion, set in February 2018.

U.S.-listed bond ETF monthly trading volumes

U.S.-listed bond ETF monthly trading volumes

Source: Bloomberg, BlackRock (as of Nov. 1, 2018)

Bond ETF buying and selling accelerated with market volatility. Major stock and bond benchmarks fell in October as investors reacted to trade tensions and renewed worries that tighter financial conditions might squeeze borrowers across the globe. The S&P 500 fell 6.8% last month, its worst monthly decline in since Sept. 2011 on a total return basis.2 The Bloomberg Barclays US Aggregate Bond Index, a widely known benchmark for the U.S. investment-grade bond market, returned minus 0.8% over the same time frame.3

Corporate bonds to the fore

Corporate bond ETFs were the most heavily traded fixed income category last month, and total volumes in U.S.-listed high-yield and investment-grade bond ETFs set records. High-yield bond ETFs traded $70 billion, or $3.2 billion per day in October on average, while investment-grade corporate bond ETFs traded $37 billion for the month, or $1.7 billion per day on average.4

U.S.-listed corporate bond ETF trading volume

U.S.-listed corporate bond ETF trading volume

Source: Bloomberg (Data as of Nov. 1, 2018)

October’s ETF volume spike also suggested that a growing number of investors traded ETFs instead of, or in addition to, individual bonds, which can lack the liquidity generally offered on exchange. The trend underscores that many investors seek out the immediacy and efficiency of on-exchange trading. Evidence for the increase can be found by comparing bond ETF trading volumes with individual bond trading volumes.

For example, trading in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) relative to the trading in individual high-yield bonds reached 17% in October, the highest level on record. Some $254 billion of high-yield bonds traded over the counter last month, while HYG trading volume hit $44 billion.5

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) trading in proportion to HY cash bond trading

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) trading in proportion to HY cash bond trading

Source: Bloomberg, BlackRock, FINRA TRACE (data as of Nov. 1, 2018)

iShares leads the pack

iShares represented two-thirds of all bond ETF trading in October, accounting for $163 billion in volume, or $7.8 billion per day on average.6 The three most heavily traded bond ETF on U.S. exchanges last month were iShares products. HYG saw $44 billion in volume; the iShares 20+ Year Treasury Bond ETF (TLT) saw $30 billion; and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) saw $22 billion.7

Heavy volumes, orderly trading

Market uncertainty weighed on ETF investors, and all U.S.-listed bond ETFs experienced $2.7 billion in withdrawals in October.8 While that figure represents just a sliver of the total volume traded, flows indicate that investors shied away from riskier corporate bonds and sought out relative safety in short-term government bonds.

It’s worth noting that ETFs again performed as designed amid the heavy trading. Despite persistent claims that disconnects between real-time ETF trading and harder-to-trade bonds would occur in volatile markets, no such issues have materialized.

Taken together, October provided the latest example of ETFs working as “shock absorbers” in stressed markets by acting as an alternate source of liquidity for repositioning portfolios.


Chris Dieterich
ETF Strategist and Commentator
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