Same Same But Different: The Risk Profile of Corporate Bond ETFs

We show that, while corporate bond ETFs systematically exhibit lower liquidity risk than the bonds they hold, they also face heightened intermediary risk. This effect is more pronounced for high-yield ETFs, for those with less liquid portfolios, and for funds reliant on weaker Authorized Participants. A stylized model reveals how partial segmentation between ETF and bond markets drives these diverging exposures. Overall, investors of corporate bond ETFs effectively trade reduced liquidity risk for increased intermediary risk, highlighting a fundamental trade-off embedded in the ETF structure.