Investors looking to move big blocks of corporate bonds have long relied on exchange-traded funds listed on stock exchanges to jump in and out of positions. But now, they’re increasingly trading directly in the debt market.
The shift underscores a major development over the last 10 years: electronic and high-speed trading — classic methods for moving equities — are spreading to the debt market and making it easier to execute portfolio trades, where a mass of different securities is bought or sold in one fell swoop.
The growing popularity of the practice was evident in a turbulent April, when there was a record $100 billion of these transactions in the high-grade market, according to data compiled by strategists at Barclays Plc. In the first four months of the year, this type of trading accounted for 11% of the total volume in this bond cohort, converging for the first time with the share that ETFs generated.
“Many have said that the true test for portfolio trading would come when markets are volatile,” said Zornitsa Todorova, the firm’s head of thematic fixed income research. When the time came, it “stood ground and provided that liquidity that people wanted,” she said.
ETFs that bundle bonds into listed equities are hardly going away. In fact, their volume in April also hit a record high. More than $180 billion of US corporate bonds are held by ETFs, based on data compiled by Bloomberg, and their liquidity has allowed investors to buy or sell hundreds of notes at once.
Portfolio trading, which has long been used in the ETF creation and redemption process, has matured into a parallel execution channel that investors are comfortable leaning on directly. And there’s a benign feedback loop between the techniques. The expansion of credit ETFs, such as a BlackRock Inc. product (LQD) that tracks investment-grade bonds, has improved price transparency in recent years. That, in turn, has made it easier to construct and hedge block trades.
They “needed the ETFs in order to flourish,” Todorova said. “If you take the ETF out of the equation, there will be no portfolio trading.”
At Pacific Investment Management Co., several factors — including enhanced customization, improved execution and greater precision — have made it a key tool for buying and selling blocks of securities.
“Some asset managers that have been using ETFs in their portfolio construction are probably doing a little bit less on average because they can do a portfolio trade on their own now,” said Sonali Pier, multi-sector credit portfolio manager at Pimco. “But there’s still room for both.”
Each method has its advantages. ETFs are cheaper to trade, and better suited for making broad bets on macro shifts, for example. But portfolio trading allows a money manager to create a customized basket of bonds and take an idiosyncratic view.
Those differing uses may turn ETFs into more of a retail tool, while institutional investors could favor portfolio trading, said Arvind Narayanan, co-head of investment-grade credit at Vanguard Group Inc.
“It’s really just two completely different investor types in the market,” Narayanan said.
Adam Dwinells, head of corporate bond strategies at Blackstone Inc.’s credit group, said pricing algorithms and risk management models originally developed to facilitate ETF activity eventually became standalone tools that asset managers use to either shuffle holdings or hedge risk.
“It’s just become a much more embedded part of how we trade now,” he said.
Recent tariff-driven volatility offered a glimpse of that bigger transition. Portfolio trading has tended to taper off amid market turbulence, but the strategy remained strong in April, with volume for junk bonds — a less liquid corner of the market — surging to a record percentage of reported trading, at 20%, according to electronic platform Tradeweb Markets Inc.
The next frontier may be emerging markets credit, according to Barclays’ Todorova. Portfolio trading is estimated at about 10% of volume, up from just under 3% a year ago, she said.
“This growing interconnection between ETFs and PT is an overall positive for the credit marketplace,” said Sam Berberian, head of credit trading at Citadel Securities. “It integrates liquidity across investor segments and promotes a healthy cycle of innovation and transparency.”
Updates with quote in the last paragraph. An earlier version of this story was corrected to clarify that portfolio trading volumes in emerging markets are expected to rise.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
