Tokenization may be the next frontier for exchange-traded funds.

BlackRock, the world’s largest asset manager, is reportedly laying the groundwork to bring ETFs onto the blockchain, according to Bloomberg. While a company spokesperson said the firm is “regularly talking to clients about the promise and potential of tokenization,” industry analysts said the move feels inevitable given the industry-wide shift toward digitization. If successful, it could change how investors access, trade and settle securities.

“The industry has been talking about this for a few years, and there’s already some similar products out there,” said Roxanna Islam, VettaFi’s head of sector and industry research. “So it’s not necessarily a surprise that this would happen next.”

Tokens On the Table

ETF tokenization could allow shares to be traded outside of market hours, open up greater access to international investors and lead to more “operational efficiencies” for issuers, Islam said. Franklin Templeton and WisdomTree already run a tokenized money market fund and a tokenized digital mutual fund, respectively, but no tokenized ETFs are currently traded on any of the main exchanges.

BlackRock also has a tokenized money market fund — the BlackRock USD Institutional Digital Liquidity Fund, or BUIDL, which trades short-term Treasurys and repurchase agreements — but it’s only available to institutional investors. Islam said tokenization could broaden ETF access for retail investors. “It’s kind of like Bitcoin. It’ll be more decentralized,” she said. “It’s supposed to open access up a little bit more to the broader public.”

BlackRock’s move likely reflects surging retail demand for its digital assets, namely:

• BlackRock’s spot bitcoin ETF, the iShares Bitcoin Trust ETF (IBIT), which has garnered $87 billion in assets since its launch last year.
• The tokenized fund, BUIDL, which also launched last year and now manages around $2 billion in assets.

Chained Up. Tokenization has been the word on Wall Street, with everything from private credit to real estate assets hitting the blockchain. Still, whether ETFs will join the fray remains up to regulators. Just last week, Nasdaq petitioned the Securities and Exchange Commission for permission to tokenize US securities, a move its SVP of North American Markets Chuck Mack said in a statement was a reflection of both market demand and the fact that we’re living “in a digital world.”

Need an active, fixed-income ETF? Vanguard just checked both boxes.

The firm launched the High-Yield Active ETF (VGHY) today in its latest push into actively managed bond products. CEO Salim Ramji has prioritized the expansion and said last year that Vanguard was in a prime position to make its mark on a segment that he called antiquated and expensive. The new ETF is not a copy of Vanguard’s $25 billion High-Yield Corporate Fund, a mutual fund, but the ETF has broader coverage for credit quality, going as low as CCC (the mutual fund is focused on BB and B).

“Both products will be well-supported, and investors will have the choice across our lineup,” said Rebecca Venter, senior fixed income product manager at Vanguard. “We’ve also seen over time that the high-yield corporate bond market has shifted quite dramatically since the Great Financial Crisis.”

Quality Control

The traditional high-yield credit market has moved up in quality as a result of more lower-quality issuance in the bank loan and private credit markets, Venter said. Today, BB-rated debt accounts for over half of the high-yield market, she noted. Here’s how VGHY compares to the mutual fund:

• Fees for the new ETF are 0.22%, matching those of the High-Yield Corporate Fund’s Investor Shares, but higher than that fund’s 0.12% charged by the Admiral Shares.
• VGHY’s portfolio manager is Michael Chang, who also manages the High-Yield Corporate Fund along with Wellington Management’s Elizabeth Shortsleeve.

The fund, the ninth in Vanguard’s line of active bond ETFs, follows numerous other fixed income launches this year. In July, for example, the firm added three Treasury ETFs, following its addition of the Multisector Income Bond ETF in April. The company also rolled out two fixed income model portfolio options the same month.

Junk Sale: It’s about time that Vanguard had a high-yield ETF, but the surprise in this launch is that the fund is actively managed, said Jeff DeMaso, editor of The Independent Vanguard Adviser. In an analysis he published today, DeMaso rated the ETF as a “buy,” but he also discouraged people from buying it, at least for a while. The reason for that? Spreads are tight, he said, with yields on corporate junk bonds being about 2 percentage points higher than yields on intermediate-term Treasurys, which is significantly below the long-term average of over 3.5 percentage points.

“It’s about time Vanguard filled this gap,” DeMaso said. “But the launch comes at the wrong time. For now, patience — not bold moves — is the smarter play.”

Without being koi, sometimes it’s nice to be a big fish in a small pond.

Richard Hoge, a former COO of Janus Henderson’s ETF business, recently landed at Reckoner Capital Management, and has been tasked with building out its exchange traded fund suite (currently, the firm has one). The firm, which launched in February backed by RedBird Capital Partners, rolled out its $33 million Leveraged AAA CLO ETF (RAAA) in July. ETFs are a central piece of the company’s plan to build out a global credit platform, CEO John Kim said.

“The aim is to bring alternative assets to various client bases in very easy-to-access wrappers,” he said, adding that the ETF market “is the most easily accessible for the vast majority of investors.”

Pond, Meet Ocean

The ETF business is booming, continually breaking sales records, while a flood of new products come to market. But it’s dominated by a few massive players (ahem … BlackRock, Vanguard and State Street), and finding a niche for differentiation is becoming harder. Reckoner’s broad requirements for new ETFs are that they be strategies that belong in the format and aren’t the latest iterations of products that already exist, said Kim, who prior to the company’s founding was CEO and CIO of Panagram Structured Asset Management. On the first point, private credit is a no-go, given the liquidity constraints, he said. “We are very conscious of daily liquidity.”

Hoge’s background could help with that:

• He previously held executive roles at Natixis and KPMG.
• The firm he co-founded in 2009, VelocityShares, was bought by Janus Henderson in 2014 for $30 million. At the time, it was seen more as a play to acquire talent rather than an easy way to enter the ETF business, ETF.com’s Dave Nadig wrote.

Let’s Get Real: Hoge, who has backgrounds in law and taxation, “knows the ETF market extremely well,” Kim said. “He has a lot of different viewpoints that he can bring to bear on new product creation… We need someone to be the realist in the room.”