Bond ETFs aren’t cheap to borrow, finds Markit
23 May 2014 London
Image: Shutterstock
Bond exchange-traded funds are among the most expensive to borrow in the US ETF market, according to Markit Securities Finance.
Markit analyst Andrew Laird charted the top 20 most expensive-to-borrow ETFs, with the top six including Vanguard Intermediate Term Corporate Bond ETF and Market Vectors Emerging Markets Local Currency Bond ETF.
Laird said: “As interest rates remain at historic lows, some investors will no doubt see ETFs as a conduit to take a view on rising rates, especially given the logistical issues around shorting bonds.”
Investors are also willing to pay a premium for short exposure to emerging markets, especially Russia and China, according to Laird.
“It is no accident that these are market areas that structurally impede or prohibit short selling. Paying 7 percent a year to borrow an Indonesian basket in a relatively liquid market starts to make sense when looking at the logistics needed to borrow the constituents in the domestic market whose borrow fees often do not match that of the ETF.”
Laird also stated that ETFs are one the few “success stories” in securities lending over the last couple of years.
“Fees generated through lending out ETF assets have generally held up despite the fact that the available pool of ETF assets to borrow from stands at an all-time high. Currently, return to lendable of US listed ETFs is five times higher than equities in the same market.”
Markit analyst Andrew Laird charted the top 20 most expensive-to-borrow ETFs, with the top six including Vanguard Intermediate Term Corporate Bond ETF and Market Vectors Emerging Markets Local Currency Bond ETF.
Laird said: “As interest rates remain at historic lows, some investors will no doubt see ETFs as a conduit to take a view on rising rates, especially given the logistical issues around shorting bonds.”
Investors are also willing to pay a premium for short exposure to emerging markets, especially Russia and China, according to Laird.
“It is no accident that these are market areas that structurally impede or prohibit short selling. Paying 7 percent a year to borrow an Indonesian basket in a relatively liquid market starts to make sense when looking at the logistics needed to borrow the constituents in the domestic market whose borrow fees often do not match that of the ETF.”
Laird also stated that ETFs are one the few “success stories” in securities lending over the last couple of years.
“Fees generated through lending out ETF assets have generally held up despite the fact that the available pool of ETF assets to borrow from stands at an all-time high. Currently, return to lendable of US listed ETFs is five times higher than equities in the same market.”
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