Mutual Funds and ETFs’ Share of the Corporate Bond Market: What’s the Right Answer?

By Shelly Antoniewicz

January 19, 2017

Participation by mutual funds and exchange-traded funds (ETFs) in US corporate bond markets was a topic of discussion during several sessions held at the American Economic Association Meetings in Chicago earlier this month. Panelists and presenters alike cited “statistics” on the share of corporate bonds held by funds. The funny thing was, they all cited different numbers, running the gamut from 18 to 35 percent.

That’s quite a range and prompts the obvious question: “What’s the right answer?”

The right answer, shown in the figure below, is 18 percent. This statistic—derived from the Financial Accounts of the United States, published by the Federal Reserve Board—represents the holdings by all types of mutual funds and ETFs of outstanding bonds issued by domestic corporations, as well as foreign bonds held by US residents, as of September 2016.

Mutual Funds and ETFs Hold 18 Percent of Outstanding Corporate Bonds¹
Percent; year-end, 2001–2016²

¹Calculated from Table L.213 (sum of lines 34 and 36 divided by line 1, expressed as percent) in the Flow of Funds Accounts, Financial Accounts of the United States (Release Z.1), published by the Federal Reserve Board in March 2016; includes foreign bonds held by US residents.

²As of September 2016

Sources: Investment Company Institute and Federal Reserve Board

Why are the other estimates too high?

It’s because they assume that assets under management (AUM) of corporate bond funds are a reasonable proxy for the total amount of corporate bonds actually held by those funds. In other words, the use of AUM implicitly assumes that corporate bond funds invest only in corporate bonds. As the pie chart below shows, this assumption by no means accurately represents corporate bond fund portfolios. For example, as of September 2016, corporate bond mutual funds and ETFs held only 57 percent of their AUM in corporate bonds, while the remainder was invested primarily in US government securities.

Corporate Bond Mutual Funds and ETFs* Hold a Variety of Assets
Percentage of total net assets; September 2016

* Excludes mutual funds and ETFs that invest primarily in US government securities, mortgage-backed securities, municipal securities, or bank loans.

Sources: Investment Company Institute and ICI tabulations of Morningstar Direct data

These distinctions are important, especially in light of policy concerns regarding the potential for market liquidity to evaporate during times of financial market stress and possibly ignite fire sales in the corporate bond market. Policymakers, academics, and market participants should indeed consider these issues—but that consideration must be based on accurate data.

Shelly Antoniewicz is an ICI senior economist in industry and financial research.

TOPICS: Bond Fund Bonds Exchange-Traded Funds Financial Stability Fund Regulation Mutual Fund Policy Research

The Taper Tantrum—Take II

By Shelly Antoniewicz

December 13, 2016

Long-term interest rates in the United States have been on the rise since summer 2016—slowly creeping up from July through October, and then jumping after the presidential election. Thus far, the response from bond mutual fund investors has been subdued. Nevertheless, various commentators—from the vice chairman of the Federal Reserve Board to the multinational Financial Stability Board—have expressed concerns that bond fund investors may rush to redeem shares to avoid portfolio losses stemming from unexpected increases in interest rates.

Revised Fed Data Show Mutual Funds’ Share of Corporate Bond Market Is Small and Stable

By Shelly Antoniewicz

August 26, 2016

Discussions among regulators and the financial press about the role of bond mutual funds in financial stability risks have been fueled by concerns about the size and apparent growth in bond funds’ participation in corporate bond markets. But what if that role and its growth have been largely overstated?

Matching Models to Reality: Bond Market Investors Don’t Follow the “First-Mover” Script

By Brian Reid

July 18, 2016

Fourth in a series of ICI Viewpoints testing the hypotheses of academics and regulators about mutual fund and investor behavior during times of market stress.

Regulators and researchers have put forward a common narrative that fund investors can destabilize markets during a period of market stress. They have advanced several hypotheses—including the concept of a first-mover advantage—to support their narrative. These hypotheses produce testable predictions about how fund investors behave in troubled markets: not only will investors redeem their fund shares but they also will stop purchasing new fund shares, thus creating large destabilizing net outflows from funds.

Matching Models to Reality: In a Falling Market, the Real “Movers” May Be...the Buyers

By Brian Reid

July 15, 2016

Third in a series of ICI Viewpoints testing the hypotheses of academics and regulators about mutual fund and investor behavior during times of market stress.

Matching Models to Reality: The Real-World Challenges to Regulators’ “First-Mover” Hypothesis

By Sean Collins

July 14, 2016

Commentators have long predicted that, one of these days, a market downturn will send U.S. mutual fund investors racing for the exits.

The Liquidity Provided by ETFs Is No Mirage

By Todd Bernhardt

June 20, 2016

The article above ignores fundamental information about ETFs, the behavior of investors, and the effects of market structure on the ETF product.

The “Waterfall Theory” of Liquidity Management Doesn’t Hold Water

By Sean Collins and Chris Plantier

March 9, 2016

In a series of recent blog posts, economists at the Federal Reserve Bank of New York have discussed new research assessing the potential for bond mutual funds to pose systemic risks.

MetLife Case Shows That “Assuming the Worst of the Worst of the Worst” Doesn’t Work

By Mike McNamee

February 24, 2016

If regulators are going to impose strict rules and heavy burdens on a business, should they have to demonstrate that those rules and burdens address an actual and probable risk?

New Research by New York Fed Confirms: Bond Funds Don’t Pose Systemic Risks

By Chris Plantier and Sean Collins

February 23, 2016

In a series of recent blog posts, economists at the Federal Reserve Bank of New York discussed results from a theoretical model assessing the potential for bond mutual funds to pose systemic risks.

Derivatives—Please Don’t Let Them Be Misunderstood

By Shelly Antoniewicz

February 22, 2016

Derivatives are important portfolio management tools that provide funds with many potential benefits, including the ability to:

hedge risk;
enhance liquidity, because derivatives can be more liquid than traditional physical securities;
gain or reduce exposure to unique markets or to asset classes when access through other instruments is difficult, costly, or impossible;
manage or equitize cash; and
reduce cost.

High-Yield Bond Mutual Fund Flows: An Update

By Sean Collins

December 23, 2015

In an ICI Viewpoints on December 16, we debuted new weekly data on flows to high-yield bond mutual funds, presenting data through December 9. In light of continuing developments in the high-yield market, we have had requests to provide an update this week, taking into account the flows through December 16. Here is our overview.

High-Yield Bond Mutual Fund Flows: Some Perspective

By Sean Collins

December 16, 2015

Recent conditions in the high-yield credit markets have raised questions about the impact of market turmoil on mutual funds investing in that segment of the bond market.

The First Move: MSRB Issues a Proposal for Shortened Settlement Cycle

By Marty Burns

December 8, 2015

Recently, the Municipal Securities Rulemaking Board (MSRB) opened the door on the regulatory filings needed to move the U.S. securities markets to a shortened settlement cycle.

U.S. Bond ETFs Resilient on August 24

By Shelly Antoniewicz

November 20, 2015

Some observers have suggested that equity market volatility on August 24, 2015, spilled over into other markets and products, in particular to bond exchange-traded funds (see, for example, Bank of England Financial Stability Paper, no. 34, October 2015, pages 26 and 27). In our analysis of the events of that morning, we conclude that U.S. bond ETFs were resilient and largely immune to the turmoil in the equity markets.

The Wall Street Journal’s Dangerous Disservice to Investors

By Mike McNamee

September 22, 2015

For 75 years, mutual funds have successfully met their regulatory obligation to fulfill redemption requests within seven days, meeting investor demands and delivering on their investment objectives through good markets and bad.

Yet the Wall Street Journal seems determined to ignore this established history and the circumstances surrounding it. It has created a liquidity “measure” of its own devising—a test that no regulator has endorsed and no informed market participant would credit. The newspaper uses its self-invented process to imply that bond mutual funds are “pushing the limits” of Securities and Exchange Commission (SEC) guidelines governing fund liquidity.

New York Times Paints False Picture of Funds’ Emerging Market Investments

By Mike McNamee

August 24, 2015

With the global market turmoil over the past week, it’s no surprise that journalists are looking for hot stories of panic, investor flight, and impending crisis. Either they believe that investors are inherently flighty and panic-prone, or they believe that “this time is different” and investors who have not panicked before will panic now.

The IMF on Asset Management: Sorting the Retail and Institutional Investor “Herds”

By Sean Collins

June 4, 2015

Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In this ICI Viewpoints series, we’re examining the wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations in the International Monetary Fund’s April 2015 Global Financial Stability Report (GFSR)—specifically, the chapter on “The Asset Management Industry and Financial Stability.” These problems undercut the IMF’s conclusion that “Even simple investment funds such as mutual funds can pose financial stability risks.”

The IMF on Asset Management: Which Herd to Follow?

By Sean Collins

June 1, 2015

Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.

In April 2015, the International Monetary Fund (IMF) published its most recent Global Financial Stability Report (GFSR), which included a chapter titled, “The Asset Management Industry and Financial Stability.”

We have heard suggestions from more than one observer that the IMF’s GFSR Chapter on asset management provides a wealth of charts, tables, and data to support regulators’ case that regulated funds or asset managers could pose systemic risks.

The IMF on Asset Management: The Perils of Inexperience

ETFs Don’t Move the Market—Information Does

By Shelly Antoniewicz

March 11, 2014

There they go again.

Money Market Funds and Liquidity Ratios: Why So High and Stable?

By Chris Plantier

February 19, 2014

Second in a series of posts about ICI’s new data release, a monthly compilation and summary of portfolio data from taxable money market funds. To find out more, read the first post about the new data summary or this list of answers to frequently asked questions.

The SEC’s 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days (known as weekly liquidity) and at least 10 percent of their assets in securities that are deemed to be liquid in one business day (known as daily liquidity). In practice, money market funds—especially government money market funds—hold liquidity well above these minimum standards, and these ratios change very little in any given month.

ICI’s New Data Release: Further Enhancing the Transparency of Money Market Funds

By Chris Plantier

January 21, 2014

The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds’ holdings and operations.

The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure—SEC Form N-MFP—with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it’s filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry.

Money Market Funds and the Debt Ceiling: What Do We Know?

By Brian Reid

October 14, 2013

As the U.S. Treasury reaches the limits of its borrowing authority this week, markets and the media are focusing on the risk that the United States will default on its debt and fail to pay interest or principal on maturing Treasury securities, perhaps before the end of October.

Bond Fund Flows: A Little Perspective on the Big Bond Market

By Brian Reid

July 3, 2013

The sharp run-up in interest rates since late April has caused many bond funds to experience their first losses in several years.

Read more…

TOPICS: Bonds Financial Markets

Mutual Funds and ETFs’ Share of the Corporate Bond Market: What’s the Right Answer?

By Shelly Antoniewicz

Mutual Funds and ETFs Hold 18 Percent of Outstanding Corporate Bonds1 Percent; year-end, 2001–20162

Corporate Bond Mutual Funds and ETFs* Hold a Variety of Assets Percentage of total net assets; September 2016

The Taper Tantrum—Take II

By Shelly Antoniewicz

Revised Fed Data Show Mutual Funds’ Share of Corporate Bond Market Is Small and Stable

By Shelly Antoniewicz

Matching Models to Reality: Bond Market Investors Don’t Follow the “First-Mover” Script

By Brian Reid

Matching Models to Reality: In a Falling Market, the Real “Movers” May Be...the Buyers

By Brian Reid

Matching Models to Reality: The Real-World Challenges to Regulators’ “First-Mover” Hypothesis

By Sean Collins

The Liquidity Provided by ETFs Is No Mirage

By Todd Bernhardt

The “Waterfall Theory” of Liquidity Management Doesn’t Hold Water

By Sean Collins and Chris Plantier

MetLife Case Shows That “Assuming the Worst of the Worst of the Worst” Doesn’t Work

By Mike McNamee

New Research by New York Fed Confirms: Bond Funds Don’t Pose Systemic Risks

By Chris Plantier and Sean Collins

Derivatives—Please Don’t Let Them Be Misunderstood

By Shelly Antoniewicz

High-Yield Bond Mutual Fund Flows: An Update

By Sean Collins

High-Yield Bond Mutual Fund Flows: Some Perspective

By Sean Collins

The First Move: MSRB Issues a Proposal for Shortened Settlement Cycle

By Marty Burns

U.S. Bond ETFs Resilient on August 24

By Shelly Antoniewicz

The Wall Street Journal’s Dangerous Disservice to Investors

By Mike McNamee

New York Times Paints False Picture of Funds’ Emerging Market Investments

By Mike McNamee

The IMF on Asset Management: Sorting the Retail and Institutional Investor “Herds”

By Sean Collins

The IMF on Asset Management: Which Herd to Follow?

By Sean Collins

The IMF on Asset Management: The Perils of Inexperience

By Sean Collins

SEC Chair White Affirms Agency Has Tools to Address Risks in Industry

By Rachel McTague

The IMF Quietly Changes Its Data, but Not Its Views

By Chris Plantier

Federal Reserve Reverse Repo Facility Helps Stabilize Short-Term Money Markets

By Chris Plantier

More Unfounded Speculation on Bond ETFs and Financial Stability

By Shelly Antoniewicz and Mike McNamee

Why Long-Term Fund Flows Aren’t a Systemic Risk: Multi-Sector Review Shows the Same Result

By Sean Collins

Simple Answers to the Federal Reserve’s Quandaries

By Mike McNamee

Why Long-Term Fund Flows Aren’t a Systemic Risk: Understanding the Data on Institutional and Retail Investors

By Sean Collins

Why Long-Term Fund Flows Aren’t a Systemic Risk: Plus Ça Change, Plus C’est La Même Chose

By Sean Collins

Why Long-Term Fund Flows Aren’t a Systemic Risk: Past Is Prologue

By Sean Collins

Bloomberg Ignores the Evidence on Bond ETFs

By Mike McNamee

Sizing Up Mutual Fund and ETF Investment in Emerging Markets

By Chris Plantier

The Real Lessons to Be Learned from 1994’s Bond Market

By Brian Reid

European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June

By Chris Plantier

GMM Policy Forum: BlackRock’s Larry Fink Speaks with ICI’s Paul Stevens

By Todd Bernhardt

“Market Tantrums” and Mutual Funds: A Second Look

By Sean Collins and Chris Plantier

Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort

By Chris Plantier

U.S. Prime Money Market Funds and European Borrowing

By Chris Plantier

ETFs Don’t Move the Market—Information Does

By Shelly Antoniewicz

Money Market Funds and Liquidity Ratios: Why So High and Stable?

By Chris Plantier

Mutual Funds and ETFs Hold 18 Percent of Outstanding Corporate Bonds¹
Percent; year-end, 2001–2016²

Corporate Bond Mutual Funds and ETFs* Hold a Variety of Assets
Percentage of total net assets; September 2016