Rieger Report®: Dystopia; Bond ETF Share Prices Dislocate from NAVs

Dystopia: Bond ETF Share Prices Dislocate from their NAVs

There is a significant and troubling after effect of the disorderly Coronavirus driven markets: several bond ETFs share prices have dislocated significantly from their Net Asset Values (NAVs).

Some examples of some ETFs where share prices are significantly lower than their NAV: (Approximate and stated as a % difference) (1)

  • PIMCO Active Bond (BOND): 2.5% lower
  • iShares National Muni Bond (MUB): 7% lower
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD): 4.4% lower
  • Invesco Senior Loan (BKLN): 14% lower
  • VanEck Vector’s High-Yield Municipal (HYD): 23% lower
  • SPDR Nuveen Bloomberg Barclays High Yield Municipal (HYMB): 18% lower

Sources: Yahoo Finance. Past performance is not a guarantee of future results. Data as 3/18/2019. Use of the term “Bond” in this report represents bonds, securities and instruments traded in the credit markets. (1) Snapshot in time, fast moving markets can dramatically change these results.

Bond ETF Share Prices Dislocate from their NAVs, but why?

There is an exasperated and varying degree of secondary market liquidity for individual bonds. The current fast & furious bond markets have changed how investors, dealers and ETF market makers behave in regard to risk taking.

Price discovery is impacted:

  • These bonds are not traded on a single exchange instead they trade over-the-counter (OTC).
  • Not every bond trades every day, nor does every bond trade near the close of business each day when NAV’s are calculated.
  • Transaction size can also impact the trade price used in a transaction. In general, smaller blocks of bonds trade at different prices than larger blocks of bonds.
  • The sheer number of individual bonds, varying terms and conditions, term structure, quality, sector of issuance all contribute to the pricing challenges.

Liquidity in orderly markets (in general):

  • USD corporate bonds have deeper secondary market liquidity than other credit markets segments such as municipal bonds and senior loans.
  • Junk corporate bonds have deeper secondary market liquidity than senior loans and high yield municipal bonds.
  • Of these examples, high yield municipal bonds have the least depth in secondary market liquidity.

In disorderly markets, liquidity can dry up in a heartbeat.

Conclusion: In my view, the more accurate reflection of market conditions is reflected by the ETF share price and not the NAV of the ETF. As always, do your homework, understand what the ETF is holding and if the risk of the ETF is offset by its apparent depressed price.

Analyst Disclosure:

  • At the time of this writing, JR Rieger owns individual municipal bonds and a bond fund.

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