When Gilles Pradere saw a money-making opportunity to go long European credit in January, he decided against selling default swaps and rode one of this year’s hottest trades instead.
He bought shares in BlackRock Inc.’s Core Euro Corporate Bond ETF.
In so doing, the Geneva-based portfolio manager at RAM Active Investments was part of a flock of investors who have migrated to the 13.6 billion euro ($15 billion) product this year, spurring a record $5.5 billion of inflows.
Demand for the strategy is helping to spark technological innovation like electronic portfolio trading, bringing Europe closer to the livelier U.S. It’s also brought the size of the BlackRock fund relative to its underlying market closer to that of its more famous American cousin, the $35 billion LQD.
The ETF allowed Pradere “to get a very diversified exposure in one go as well as offering much better liquidity than individual cash bonds,” he said. At the time, he reckoned bonds were cheaper than swaps. He has since exited the trade for a profit.
With negative yields in safe assets triggering a hunt for returns in corporate bonds, the clamor for European credit has been at fever pitch all year. ETFs, along with other index-based products, allow investors to gain exposure to a basket of securities in a single trade.
They’ve been slow to make inroads in Europe, though. Thanks to a slew of structural impediments holding back ETFs, credit-default swap indexes remain the instrument of choice for managers seeking a liquid alternative to the cash market. CDS contracts give credit exposure to a basket of companies, while ETFs also have embedded interest-rate risk.
The growth of ETF assets in Europe is fueling hopes that it’ll add to the boom in portfolio trades, a newfangled strategy in which multiple bonds from different borrowers change hands in a single transaction.