Hybrid investments like corporate bonds exchange-traded funds have become a popular alternative in today's market. With their lower expenses, reduced tax distributions and greater ease of trading, they have become a go-to investment for everyone from large firms to everyday traders. However, it is important to realize that these new funds may pose a potential risk to individual investors, as well as markets and the global economy.
Corporate bond ETFs are baskets of bonds that trade on equity exchanges as a single stock. The pairing of ETFs, which can trade millions of shares a day, and corporate bonds, which may trade only a few times a month, if at all, was so unlikely when they were first introduced in 2002 that many questioned their appeal to investors and viability on the Street.
But corporate bond ETFs succeeded by combining two of the most important market developments over the past decade: the outsized growth of corporate bonds and the soaring popularity of ETFs for institutional and retail investors.