Doubts raised over corporate bond ETFs Large institutional trades in corporate bond exchange traded funds could be distorting the prices of shares in the funds, according to analysts and investors. Institutional investors have been drawn to ETFs to trade illiquid corporate bond securities, as Wall Street dealers reduce their bond inventories in an effort to reduce risk. IN Exchange Traded Funds Some analysts say big institutional trades may contribute to the funds" volatility to the detriment of retail investors using them. "If institutional trades of large size lead gaps to open up between the share price of the ETF and the underlying index, retail investors could be deterred from using the ETF," said Neal Epstein, senior credit officer at the rating agency Moody's. Assets in fixed income ETFs have increased almost 40 per cent to more than $225bn in the last year, according to Deutsche Bank. Institutions have piled into the funds as broker-dealers, who traditionally trade bonds directly with large institutional clients, cut back on inventory. ETF sponsors, and their dealers, who work alongside bond trading desks at investment banks, tout ETFs as an alternative. The funds operate by holding many of the securities in the index they track, and issuing shares, which are a claim on those securities. Shares can be created or redeemed by dealers, who supply a specified basket of securities to the fund sponsor, or cash in shares for specified securities. Two fund sponsors and two broker-dealers said they offered institutional investors flexibility when it came to the securities used in such transactions. For institutional investors this has advantages. It can allow access to illiquid securities when shares are redeemed, or the substitution of cash for securities when shares are created. "It's natural for institutional investors to leverage the liquidity of bonds ETFs to discreetly build positions," said Loc Vukhac, a managing director in institutional sales at BlackRock, the largest ETF sponsor by assets. Such transactions have contributed to the surge in institutional ownership of some bond ETFs. Institutional ownership of BlackRock's high yield bond fund and State Street's junk bond fund have both risen more than ten percentage points this year, according to Bloomberg data. Meanwhile, both have diverged by three percentage points from the indices they track. ETFs sponsors say this is because the funds respond to changes in demand faster than indices. But some investors say the ETFs are sending incorrect pricing signals. "In the high yield market it is difficult to put large amounts of money to work quickly," said Greg Hopper, a senior portfolio manager at Artio Global Advisors, which does not use ETFs. ETFs tried to solve this, he added, by concentrating on the larger names but drove the prices of what they were buying up and what they were selling down.