The Unintended Consequences of Corporate Bond ETFs: Evidence from the Taper Tantrum
62 Pages Posted: 2 Apr 2020 Last revised: 10 Jan 2022
Date Written: March 3, 2021
This paper examines whether ETFs are a unique source of corporate bond fragility. Relative to mutual funds, ETFs cater to high-liquidity-demand investors, facilitate positive feedback strategies, and transmit outflows to corporate bonds via near proportional trading. Comparing yield spread changes of bonds from the same issuer, we show that ETFs create flow-induced pressure during the Taper Tantrum, a period of market turmoil. Redemptions used to maintain the relative price efficiency of the largest and most liquid ETFs lead to significantly higher yield spreads for 4 months before reverting. The pattern indicates ETFs amplify the effects of negative fundamental shocks.
Keywords: Corporate Bonds, ETFs, Mutual Funds, Turmoil
JEL Classification: G12, G23, G10
Suggested Citation: Suggested Citation