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Are Beleaguered High-Yield Bond ETFs Structurally Safe?
Not sure what to make of this - i.e., under what circumstance this quote would make sense --
"A 2% to 3% discrepancy between its price and the NAV is not significant enough to worry about, states Iachini. The key is not to trade massive outliers."
-- given that a 2-3% discrepancy for an etf seems plenty big itself under any kind of normal circumstance. Most etf's with decent trading volume seem to swing back toward zero discount/premium relatively quickly any time they get even in the 1-2% range. If you buy at a 2-3% premium, you're essentially in the hole right from the start.
If there is a REAL credit crunch, shareholders could be issued pieces of individual bonds instead of cash in some of these. So no, they are not structurally "safe." Look what happened to the high-yield fund that blew up last year. There were NO buyers for much of what it owned, which was not just junk, it was crapola. Yes, there are some other funds/ETFs that are probably just as bad in terms of their holdings. So buyer beware.
Nothing in the capital markets is structurally safe and that is the reality. Just a matter of degrees.
With junk bonds, one has to worry whether the crisis is just a temporary mark to market induced crisis or a default induced crisis or if both how much of each. If just the former, then just holding tight would restore much of the values riding out current value fluctuations unless there is a huge rush to the exits forcing sells in the underlying funds realizing a loss. If the latter then the credit quality of the underlying bonds have deteriorated and some of them may become worthless.
To me, it seems like it is the fear of the latter that is causing a mark to market crisis in this area for now rather than actual defaults happening. The defaults could happen as much as feared or it may be overblown in which case, they all bounce back up creating buying opportunities.
These days markets are based on trying to front-run possibilities than wait for something to become real.
Comments
"A 2% to 3% discrepancy between its price and the NAV is not significant enough to worry about, states Iachini. The key is not to trade massive outliers."
-- given that a 2-3% discrepancy for an etf seems plenty big itself under any kind of normal circumstance. Most etf's with decent trading volume seem to swing back toward zero discount/premium relatively quickly any time they get even in the 1-2% range. If you buy at a 2-3% premium, you're essentially in the hole right from the start.
Etf p/d's don't behave the same way cef's do.
Other thoughts? --- AJ
With junk bonds, one has to worry whether the crisis is just a temporary mark to market induced crisis or a default induced crisis or if both how much of each. If just the former, then just holding tight would restore much of the values riding out current value fluctuations unless there is a huge rush to the exits forcing sells in the underlying funds realizing a loss. If the latter then the credit quality of the underlying bonds have deteriorated and some of them may become worthless.
To me, it seems like it is the fear of the latter that is causing a mark to market crisis in this area for now rather than actual defaults happening. The defaults could happen as much as feared or it may be overblown in which case, they all bounce back up creating buying opportunities.
These days markets are based on trying to front-run possibilities than wait for something to become real.