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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
1 Calculated 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.
2 As 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.
Education, Outreach, Advocacy: A Big 2016 for IDC and Fund Independent Directors
By Amy B. R. Lancellotta
January 17, 2017
The Independent Directors Council (IDC) just wrapped up another year of vigorous support for the fund director community—educating directors, bringing them together to share ideas and experiences, and advocating on their behalf in policy debates. This brief post, adapted from IDC’s 2016 Annual Review, highlights some of IDC’s more notable work over the course of the year.
For “401(k) Pioneers,” No Reason for Regrets
By Paul Schott Stevens
January 10, 2017
The following ICI Viewpoints is a letter to the Wall Street Journal by Paul Schott Stevens, president and CEO of the Investment Company Institute, in response to an article published on January 3, 2017.
It may be, as you report, that “401(k) Pioneers Lament What They Started” (Page A1, Jan. 3). But the facts are clear: America’s retirement system is stronger today, in the expanding 401(k) era, than it was when defined benefit pensions were the primary vehicle for retirement savings.