Morningstar: High yield ETFs could act as 'safety valve' in stressed markets

Easier to trade when liquidity dries up

Investors have been wrong to blame high yield bond ETFs for instability and liquidity problems in this part of the market as the vehicles can actually make it easier to trade when liquidity dries up, according to a report by Morningstar.

In a paper entitled High Yield Bond ETFs: A Primer on Liquidity, Morningstar has conducted research on high yield ETFs in the US and European market, questioning their "presumed" role in market instability by looking at primary and secondary layers of liquidity in ETFs. At the end of last year, fears escalated over a "meltdown" in the high yield sector, after US firm Third Avenue Management imposed a freeze on withdrawals from its $788m high yield bond fund as outflows from the sector soared. Around the same time, two of the biggest high yield bond ETFs - the SPDR Barclays High Yield ...