WEBVTT - ETF Trends' Lydon on Growing Investment in Bond ETFs (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Handquarters.

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<v Speaker 1>I'm Charlie Pellett. Stocks a little changed on this first

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<v Speaker 1>trading day of the new month. SMP five hundred index

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<v Speaker 1>has capped its longest stretch of monthly advances since two

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<v Speaker 1>thousand fourteen. Today the SMP five hundred index up two

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<v Speaker 1>points to two thousand ninety nine, a gain of one

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<v Speaker 1>tenth of one percent, and has stack up four points,

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<v Speaker 1>a gain of point one percent. Down Industrial is up

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<v Speaker 1>two points to seventeen thousand, seven hundred eighty nine, a

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<v Speaker 1>gain there of less than point one percent. Ten year

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<v Speaker 1>yield one point eight four percent. Gold down to seventy

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<v Speaker 1>to twelve fourteen eighty, a drop of point two percent.

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<v Speaker 1>Crude oil up ten cents forty nine twenty barrel ahead

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<v Speaker 1>of the OPEC meeting, it is up by two tenths

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<v Speaker 1>of one percent. I'm Charlie Pellett, and that's a Bloomberg

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<v Speaker 1>Business Flash. You're listening to taking Stock with Pim Box

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<v Speaker 1>and Kathleen Hayes on Bloomberg Radio. If you can't buy

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<v Speaker 1>bonds as easily as you used to. What do you do?

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<v Speaker 1>Trific story on the Bloomberg Today arguing that Wall Street

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<v Speaker 1>is turning to e t F s exchanged red of

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<v Speaker 1>funds to sidestep persistent liquidity in the bond market. Broadly,

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<v Speaker 1>joining us now to discuss this story is Tom Leiden.

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<v Speaker 1>He is an e t F expert. He's the president

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<v Speaker 1>of Global Trends Investments and E t F Trends to

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<v Speaker 1>give us his view not only on what is driving

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<v Speaker 1>the move into bond et s, but also if it's

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<v Speaker 1>a good idea, Tom, Welcome back to the show. How

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<v Speaker 1>are you, Kathleen? Just great? U. The story points out

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<v Speaker 1>that around the Bloomberg Today that global bond ETFs, which

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<v Speaker 1>track bonding indexes and trade like stocks, attracted sixty billion

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<v Speaker 1>dollars of inflows this year through according to black Rock numbers.

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<v Speaker 1>And that's the most of the period since the funds

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<v Speaker 1>were created fourteen years ago, and on pace to top

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<v Speaker 1>last year's record total of ninety three and a half

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<v Speaker 1>billion dollars. Yeah. Absolutely, Well, different from individual securities that

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<v Speaker 1>are priced pretty tightly. Um, you know, individual bonds always

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<v Speaker 1>haven't enjoyed is great? Pricing and also as much liquidity.

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<v Speaker 1>ETFs have done a lot to help that out. With

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<v Speaker 1>all the money that's been moving into fixed income ETFs,

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<v Speaker 1>you've got that much more liquidity because they've got them

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<v Speaker 1>priced within the e t F themselves, So there's a

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<v Speaker 1>there's a great advantage there. On top of that, there's

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<v Speaker 1>a due diligence that goes into creating the underlying index

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<v Speaker 1>is whether it's a treasury index or a corporate index,

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<v Speaker 1>or a high yield index or emerging market UH fixed

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<v Speaker 1>income index, there's the underlying shares that are traded that

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<v Speaker 1>really beg for an added incentive to liquidity. How does

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<v Speaker 1>a bond e t F work? If I'm buy a

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<v Speaker 1>bond mutual fund. The good thing is that their their

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<v Speaker 1>ladder and the bonds are constantly turned over, so the

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<v Speaker 1>managers can kind of keep a steady return. The bad

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<v Speaker 1>thing is if you want something to safe, like a

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<v Speaker 1>regular bond, right, you don't have that because it's not

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<v Speaker 1>a bond. A bond's price may go up and down,

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<v Speaker 1>but a maturity you get back the value of the

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<v Speaker 1>bond and you collect the interests along the way. How

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<v Speaker 1>to e t F s work? Yeah, Well, in e

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<v Speaker 1>t F is in fact a fund, but unlike a

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<v Speaker 1>mutual fund, that can buy and sell the underlying securities

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<v Speaker 1>and then are taxed fully when they buy and sell,

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<v Speaker 1>regardless if they hold them the maturity or not. There

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<v Speaker 1>there's that pretty much pass through opportunity in the mutual fund.

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<v Speaker 1>In the e t F, it's different. Et F shares

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<v Speaker 1>has baskets of shares and these underlying shares are created

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<v Speaker 1>or redeemed based on the demand for the the e

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<v Speaker 1>t F itself, So there's a tax benefit there in

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<v Speaker 1>the fact when you sell a share or you sell

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<v Speaker 1>your own shares of an e t F, you don't

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<v Speaker 1>necessarily uh sell the underlying securities. So that's that's a

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<v Speaker 1>good thing because the authorized participant that works with the

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<v Speaker 1>index issuer can actually create these baskets and hold them

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<v Speaker 1>for an extended period of time, So there's a little

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<v Speaker 1>bit of an extra link in the chain, and there's

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<v Speaker 1>a benefit to a the shareholder from a tax standpoint,

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<v Speaker 1>but also uh there's almost the due diligence process because

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<v Speaker 1>they do have to qualify to be part of that index,

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<v Speaker 1>where in a mutual fund, a mutual fund manager can

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<v Speaker 1>buy or sell whatever he wants based on their own mandate.

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<v Speaker 1>Tom are ec is structured so that you can redeem

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<v Speaker 1>your shares for the actual underlying investments, which in this

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<v Speaker 1>case would be bonds. Is there any evidence that's happening. Well,

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<v Speaker 1>in many cases, if there is a lot of emption,

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<v Speaker 1>the e t F provider has the ability, per the

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<v Speaker 1>perspectives to actually offer up those in kind as opposed

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<v Speaker 1>to offer up cash. So in some cases we saw

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<v Speaker 1>this a couple of years ago when we saw a

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<v Speaker 1>sell off in the muni market, there were some et

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<v Speaker 1>f issuers that did in fact offer up those shares

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<v Speaker 1>and and it was up to the person that was

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<v Speaker 1>receiving those to sell. The underline. Are some institutional investors

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<v Speaker 1>using bonding tfs in a creative way, maybe as a

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<v Speaker 1>liquidity buffer for core deet holdings, or again as a

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<v Speaker 1>way to actually buy the bonds themselves. Well, the great

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<v Speaker 1>thing is today you have so many choices, just like

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<v Speaker 1>the bond market itself. Uh, it's sliced and diced in

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<v Speaker 1>so many different ways that if you're an institution or

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<v Speaker 1>a fund manager and you've got money coming in and

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<v Speaker 1>you want to be fully invested, it's really easy just

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<v Speaker 1>to select an e t F that hones in on

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<v Speaker 1>that specific gas of class. Critics are concerned in some

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<v Speaker 1>cases about high yield e t s hi yield bondyts

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<v Speaker 1>and the fact they have on bond market liquidity. How

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<v Speaker 1>about you, Well, you know, high yield is a growing

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<v Speaker 1>part of the demand in the US now UH always

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<v Speaker 1>deemed a little bit more risky. However, ever, high yield

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<v Speaker 1>defaults have declined tremendously in the last five years and

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<v Speaker 1>more money has been flowing into that area. Um. There

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<v Speaker 1>are also been periods of time when in the US

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<v Speaker 1>we've seen rising interest rates that normally would seem to

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<v Speaker 1>threaten a fixed income marketplace, but actually high yield bonds

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<v Speaker 1>have done quite well in historical periods when we've seen

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<v Speaker 1>we're rising, right, So I'm not as concern right now,

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<v Speaker 1>I think again, when you add up all the pluses

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<v Speaker 1>and minuses, most importantly, e t S has have provided

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<v Speaker 1>this added liquidity and better price discovery for underlying bonds.

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<v Speaker 1>So do you recommend click click final questions, You recommend

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<v Speaker 1>people look at bondy t s? Would you buy them? Absolutely?

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<v Speaker 1>And you know we we talk about them all the

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<v Speaker 1>time on e t F trends. Number one and and

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<v Speaker 1>most importantly the diversification and the tax opportunities there versus

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<v Speaker 1>individual issues. You've got a lot of choice, all right,

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<v Speaker 1>Tom Lydon, thank you so very much, President of Global

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<v Speaker 1>Trends Investments and E t F Trends, talking about our

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<v Speaker 1>Bloomberg story Wall Street. Turning to E t S two

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<v Speaker 1>sidestep liquidity in the bond market. Thank you for joining me.

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<v Speaker 1>Kathleen Hayes on taking stock today. Reggie Basil, thank you.

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<v Speaker 1>Our technical directory and Sam Linga, our producer. We thank

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<v Speaker 1>you as well. Tomorrow we're looking at the ECB and

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<v Speaker 1>the OPEQUE meeting. Keep it right here. This is taking stock.

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<v Speaker 1>Bloomberg Laws next on Bloomberg Radio. Coming up, Bloomberg Law

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