Michael Wehbe MarketAxess Sinem Uysal MarketAxess Share Corporate bond exchange traded fund (ETF) trading has become a popular strategy in fixed income markets. In this article, Sinem Uysal, Quant Researcher at MarketAxess, and Michael Wehbe, Quant Researcher at MarketAxess, look into two of the largest ETFs - iShares Investment Grade Corporate Bond ETF (LQD) and High Yield Corporate Bond ETF (HYG) which have US$35 billion and US$14 billion in assets under management, respectively, as of May 2023. Highlights In 2022, LQD and HYG constituents generated 61% of the inquiry volume seen by Open Trading® in US IG & HY on MarketAxess The proportion of buy inquiry volume on Open trading in US IG & HY increases when the corresponding ETF is trading at a premium according to CP+™. Introduction Corporate bond exchange traded fund (ETF) trading has become a popular strategy in fixed income markets. In this paper, we look into two of the largest ETFs – iShares Investment Grade Corporate Bond ETF (LQD) and High Yield Corporate Bond ETF (HYG) which have US$35 billion and US$14 billion in assets under management, respectively, as of May 2023. LQD constituents generated 48% of the Open Trading inquiry volume in US investment grade (US IG) on MarketAxess whereas HYG constituents generated 74% of the Open Trading inquiry volume in US high yield (US HY) on MarketAxess in 2022. CP+ NAV and Stock Price Logic explanation LQD Stock Price vs. CP+ NAV LQD Stock Price vs. CP+ NAV We use our CP+ pricing tick data to calculate the value of the ETF constituents. When the ETF price is higher than the CP+ Offer for these constituents, the ETF is trading at a premium. This generates more buying inquiries on the platform as market participants seek to buy bonds cheaply in order to assemble creation units that are exchanged for ETF shares. Conversely when the ETF price is cheaper than CP+ Bid for the constituent bonds, it trades at a discount, which leads to an increase in sell volume on the platform. USD HY/HG Volume Skew and ETF Arbitrage Taking the above dynamics into account, we can look at the relationship between platform volume skewness in US IG and US HY when LQD and HYG indices have arbitrage opportunities. We focus on 2022 MarketAxess Open Trading inquiry volumes for LQD and HYG constituents. Daily MarketAxess Open Trading Volume US HY and IG We observe a strong correlation between ETF arbitrage opportunities and volume skewness in the underlying market as presented in Figure 2. When the corresponding ETF stock price is at a premium according to CP+ valuation, the daily buy inquiry volume share increased, and peaked at 90% in US HY and at 75% in US IG during 2022. By contrast, average daily inquiry buy volume in US IG and HY during 2022 was 53% and 51%, respectively.