IMF study shows institutional ETF investors drive volatility in corporate bond markets

The International Monetary Fund (IMF) reported that institutional investors are increasing volatility in the corporate bond market by aggressively trading exchange-traded funds.

The IMF argued that the heightened volatility is particularly stark during times of market stress when instability often bleeds into real-world effects for corporate borrowers and the investors in their debt.

The IMF analysis is one of the first reports to examine the impact of the growing institutionalization of the U.S. ETF industry. It also explores the varied investor profiles of ETFs and the return volatility of the securities they hold. The research highlighted that institutional ownership of U.S.-listed corporate bond ETFs has surged from 44% in 2012 to 70% in 2025.

IMF says institutional investors are increasing corporate bond volatility

I've been 🤔a lot about this…MBS are critical as collateral across the world

What happens if the drama at FHFA shakes the confidence in the MBS market?

Or this? 👇

Probably a bit more complicated than explained here due to how they are utilized for liquidity, but…

Per IMF pic.twitter.com/pWSfBgtz7W

— Melody Wright (@m3_melody) March 25, 2025

An International Monetary Fund (IMF) analysis revealed that institutional investors are increasing corporate bond market volatility. The IMF believes that investors are fueling volatility by aggressively trading exchange-traded funds (ETFs).

The financial agency also argued that a surge in volatility was particularly common during times of market uncertainty. The IMF stated that market stress occurs when instability flows into real-world effects for corporate borrowers and the investors in their debt.

“U.S. corporate bond ETFs with a high share of institutional ownership show larger trading volumes during periods of stress.”

-International Monetary Fund (IMF).

The financial firm suggested that institutional investors use ETFs to manage risks and liquidity shocks that materialize during stress periods, which are then passed on to the underlying market. ETFs have surged to $15 trillion in assets, a fivefold increase in a decade and way above the $4.5 trillion held in hedge funds.

The agency’s research highlighted that the growth of ETFs, at the expense of more traditional mutual funds, had reduced volatility in the corporate bond market. The firm attributed it to a belief that “the guaranteed redemption of mutual fund shares at the fund’s net asset value can incentivize run-like behavior by investors.”

The IMF noted that mutual funds suffered average net outflows of 10% of their assets during the COVID turmoil of February and March 2020, which worsened the ongoing market sell-off. The firm also said that redemptions from ETFs do not necessarily lead to fire sales of the underlying bonds. The agency argued that market-makers that service ETFs may instead trade “in-kind”, which is taking the bonds to their own balance sheets and temporarily shielding the market from the full impact.

ETFs own the largest share of corporate bonds

The analysis suggested that a higher ETF ownership share may be associated with lower bond return volatility. There was a divergence between the behavior of institutional and retail investors and their impact on the market. The IMF also argued that volatility tends to be higher when institutional investors own a larger share of a bond through exchange-traded funds.

A 1 percentage point increase in the share of a bond held by retail ETF investors is associated with an 85 basis point decrease in volatility. The research found that a 1 percentage point increase in the share held by institutional ETF investors led to a 27 basis point increase in volatility. The researchers noted that “the role of institutional investors is amplified during periods of stress.”

The IMF stated that intraday trading of ETFs encourages more aggressive short-term institutional investors who are more likely to sell during periods of stress, while institutions are also more likely to take short positions in bond ETFs.

A trio of U.S. business schools revealed in 2023 that fixed-income ETFs can drain the liquidity from corporate bonds during market stress, potentially worsening price dislocations during crises.

The agency also believes that markets are more liquid than the volatility induced by trigger-happy institutional ETF investors in the corporate bond market may not necessarily be replicated in government bonds or equities.

A research by associate professor of finance at UCLA Anderson School of Management Valentin Haddad in 2022 found that the rise of passive investing of ETFs was distorting price signals and pushing the volatility of the U.S. stock market.

Keneth Lamont, principal of research at Morningstar, said it was not surprising to hear that sophisticated investors were more likely to use ETFs tactically and that it results in higher levels of trading than retail investors.

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