Liquidity Fears Spur a Fund Manager to Dump Global Junk-Bond ETF

(Bloomberg) -- If U.S. junk bond ETFs seem to be weathering their big post-crisis stress test just fine, one fund manager has less confidence that products stuffed with international names will do the same.

Jay Pelosky, chief investment officer and co-founder of TPW Investment Management in New York, said he unloaded all of his European high-yield exposure in recent weeks because he was worried about vanishing two-way trading.

All of Pelosky’s investments are in exchange-traded funds and those in the European high-yield market were made via BlackRock Inc.’s $44.3 million iShares International High Yield Bond ETF, ticker HYXU.

“It was mainly a liquidity-driven decision,” he said by email. “The liquidity in HYXU is tricky, especially compared to HYG here in the U.S.”

As Wall Street places rising odds on the likelihood of a first-half recession and ensuing credit crunch, U.S. high-yield bond spreads have surged the most on a percentage basis since 2001. Much hand-wringing has centered on ETFs, which promise investors intraday liquidity from a collection of bonds that may trade far less often.

For high-yield ETFs that have piled on assets since the financial crisis, it’s a critical test as the economic impact of the coronavirus collides with a crash in oil.

While funds that hold U.S. debt have managed to cope with withdrawals and frenzied trading so far, smaller funds with lighter volumes and less-liquid holdings may face a greater strain should a wave of redemptions hit.

BlackRock’s HYXU, which trades an average of 10,000 shares a day, holds junk debt from issuers in countries like Italy, Netherlands and France. While the ETF has seen little in the way of outflows recently, its discount to net asset value has slumped to 0.67 percentage points, the most since 2016.

For the $14.4 billion iShares iBoxx High Yield Corporate Bond ETF, ticker HYG, it’s largely been business as usual. Even on Monday, its worst-performing day since 2009, the fund traded 74 million shares and ended the session with a modest discount of half a percentage point to its net asset value. It actually added $409 million of inflows.

“We exited our European high yield position several weeks ago but we’re sticking with our U.S. high yield,” Pelosky said in an interview with Bloomberg TV on Tuesday.

--With assistance from Jonathan Ferro.

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Yakob Peterseil, Sid Verma

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