High yield corporate bond exchange-traded funds have continued to gain favour among investors during periods of elevated market volatility and falling bond prices, said credit rating agency Fitch.

Robert Grossman, Managing Director, Macro Credit Research at Fitch.

The trading ratio of high yield ETF shares to high yield bonds reached a record high of 42% on 11 December 2015, and subsequently reached above 20% on several days during the first two months of 2016. According to Fitch, trading volumes of high yield ETF shares have risen relative to the trading volumes of high yield bonds over the past year due to concerns over a potential China slowdown and continued commodity price pressures.

ETFs offer investors superior liquidity benefits compared to actual high yield bonds, a feature that may be valuable to the investor during periods of market stress and falling bond prices.

Robert Grossman, Managing Director, Macro Credit Research at Fitch notes this ratio is even more significant considering the relative sizes of the high yield bond and ETF markets: “This is a striking shift in the market considering high yield ETF assets were just $34bn at the end of February–much lower than the $1.2tn of high yield bonds outstanding.”

Dealer inventories of high yield bonds continue to fall steadily as banks, responding to financial regulation, cut their bond holdings and reduce their role as market makers. As a result, many market participants have used ETFs to access the broader high yield bond market.

In contrast, investors’ use of ETFs to access investment grade bond markets has been much less extensive regarding both corporate and Treasury bond ETFs. The trading ratio between investment grade corporate ETF shares and similar rated corporate bonds has remained mostly steady in recent months, around 10%.