Vol 15 (2018) - Issue 4

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Bond Exchange-Traded Funds

Synopsis

This article addresses bond exchange-traded funds (ETF), an innovative and increasingly popular investment product. It draws the institutional structure of an ETF and outlines the growth in the bond ETF market from its inception in 2002 to present day. While the article acknowledges the benefits provided by bond ETFs, its primary purpose is to highlight the concurrent risks. Specifically, the article stresses the inherent fragility of bond ETFs due to the mismatch between highly liquid ETF shares and the illiquid underlying bond market. Although the paper is silent on overall macroprudential or welfare implications of bond ETFs, it notes that strengthened financial regulation may have the unintended consequence of increasing the systemic risk posed by bond ETFs.