State Street Junk ETF Used to Obtain Up to $780M of Bonds

An investor used State Street Corp. (STT)’s exchange-traded fund to anonymously obtain almost $780 million of speculative-grade bonds without moving prices in the secondary market.

The investor on May 10 exchanged as much as 19.7 million shares in the SPDR Barclays Capital High Yield Bond ETF (JNK) for the equivalent of about $779.3 million in bonds held by the fund, according to data compiled by Bloomberg.

The redemption, the biggest in the four-year history of the $11.4 billion fund, came after the investor had accumulated shares over several weeks, according to Knight Capital Group Inc., which brokered the trade. The investment in the fund, which tracks the Barclays Capital High Yield Very Liquid Bond Index, may mark a new way for investors to gain control over a large group of bonds without tipping off other investors.

“He used the ETF to get his exposure initially; he figured it was an easier way to maintain his anonymity,” Eric Lichtenstein, the global head of ETF trading at Jersey City, New Jersey-based Knight Capital (KCG), said in a telephone interview. “It was a unique approach. This was his plan going into it.”

An additional 700,000 shares were redeemed on May 11, Bloomberg data show.

ETFs typically allow individual investors to speculate on securities without directly owning them. Unlike mutual funds, whose shares are priced once daily, ETFs are listed on exchanges and are bought and sold like stocks.

ETFs generally don’t buy securities directly when they receive inflows or sell them to meet outflow requests. Instead, an authorized participant receives cash from investors and uses it to buy securities in exchange for ETF shares. With redemption requests, the approved participant returns shares to an ETF’s fund manager and receives securities.

Knight Capital is the largest market-maker of ETFs, trading more than 20 percent of the daily volume, Lichtenstein said.

Junk bonds are ranked below Baa3 at Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net