What is exchange traded debt?


Certain corporations in the U.S. borrow money by issuing notes that are publicly traded on a stock exchange. We call these notes "exchange traded debt". Our database currently contains 200 exchange traded debts with a total market capitalization of $48,917,284,398. See our list of exchange traded debt. These 200 debts currently have an average stated interest rate of 6.05% and an average estimated yield of 6.40%.

As explained in our article about the U.S. bond market, most corporate bonds are traded over the counter rather than on an exchange. So exchange traded debt is a small portion of the corporate bond market.

Virtually all of the exchange traded debts are labeled as "notes" or "subordinated notes" or "subordinated debentures" by the corporation that issued them. What is the difference between a "note" and a "bond"? There may be legal distinctions between a note and a bond, but for all practical purposes to investors, they are the same. A good example of this is how the U.S. government classifies its own debt offerings. A Treasury note has a maturity between one and 10 years. A Treasury bond has a maturity of more than 10 years. Short-term Treasuries with maturities of less than one year are called Treasury bills. So the terminology doesn't really matter.

The "subordinated" part of the label refers to the priority of the debt in the event of liquidation or bankruptcy. Exchange traded debt that is labeled as "subordinated" is debt that has a lower priority compared to other debts of the corporation. Most large corporations have multiple types of debt, including bank loans that were used to purchase assets, and bank lines of credit. Exchange traded debt that is "subordinated" has a lower priority in the event of liquidation or bankruptcy compared to the corporation's other types of debt.

Exchange traded debt is almost always "unsecured" debt, which means that in the event of liquidation or bankruptcy, a creditor holding an unsecured note doesn't have any claims against specific assets of the company. If the corporation had borrowed money to buy real estate or machinery and equipment, those assets would be first used to settle the loans that had been taken out to purchase them. So unsecured borrowers are stuck with whatever assets are left after liquidating all other secured loans.

Some corporations have issued multiple classes of unsecured debt, including multiple classes of publicly traded debt, so they start labeling the debt as either "senior notes" or "junior notes". A senior note has priority over a junior note in the event of liquidation or bankruptcy, but since a senior note is usually still unsecured and subordinated, a senior note still has a lower claim than most of the corporation's other debt. The claims of a creditor holding a junior note are lower in priority to the claims of a creditor holding a senior note.

We are not aware of any requirement to do so, but exchange traded debts are always sold at a $25 stated value per share. That makes it easy to identify when an exchange traded debt is being traded at a "discount" or a "premium" because you can just look at the current market price. If the debt is trading below $25 per share, it is trading at a discount and vice versa. We sometimes refer to the $25 stated value per share as the "par value", similar to the way that preferred stocks are often sold at a $25 per share par value. The $25 per share value is also often called the "liquidation value". Exchange traded debt is issued with an agreed upon interest rate that is referred to as the "coupon" rate of interest.

Because exchange traded debt is publicly traded on an exchange, the market price always fluctuates on a daily basis. So an investor will very rarely actually buy the debt at a price of $25.00 per share. If an investor can buy the debt at a price of less than $25.00 per share, then the investor's "interest income" will be more than the stated or coupon rate of interest. Or if the investor buys the debt at a price of more than $25.00 per share, the investor's interest income will be less than the stated or coupon rate of interest. Every night, we try to calculate an investor's "real interest income" using yesterday's end of day trading price. This estimated interest income is referred to as "effective yield" or "expected yield".

Current market analysis

We categorize exchange traded debt into categories based on the remaining term of the debt. Short-term debt has a remaining term of less than 5 years. Intermediate-term debt has a remaining term of between 5 and 10 years, and long-term debt has a remaining term greater than 10 years. Here's a breakout of the exchange traded debt using those categories:

Category# of SecuritiesMarket cap% Avg YieldAvg Coupon
Total200$48,917,284,398100% 6.40%6.05%

As explained above, it is easy to determine if exchange traded debt is trading at a discount or a premium, because exchange traded debt is always issued at a $25 per share stated value. Using yesterday's end of day market price, here is a summary of exchange traded debt based on whether it is traded at a discount or premium:

Category# of SecuritiesMarket cap% Avg YieldAvg Coupon
Total200$48,917,284,398100% 6.40%6.05%

Let's compare the above coupon and yield rates to current yields associated with some of the large investment grade corporate bond ETFs:

SymbolDescriptionCurrent yieldFees Adjusted Yield
VCLTVanguard Long-Term Corporate Bond ETF3.25%0.07%3.32%
SPLBSPDR Portfolio Long Term Corporate Bond ETF3.19%0.07%3.26%
LQDiShares iBoxx $ Investment Grade Corporate Bond ETF2.60%0.15%2.75%
VCITVanguard Intermediate-Term Corporate Bond ETF2.63%0.07%2.70%
IGIBiShares Intermediate-Term Corporate Bond ETF2.54%0.06%2.60%
IGSBiShares Short-Term Corporate Bond ETF2.07%0.06%2.13%
VCSHVanguard Short-Term Corporate Bond ETF1.96%0.07%2.03%
SPIBSPDR Portfolio Intermediate Term Corporate Bond ETF1.91%0.07%1.98%
SPSBSPDR Portfolio Short Term Corporate Bond ETF1.57%0.07%1.64%

Let's also compare the above coupon rates to current yields associated with some of the large high yield corporate bond ETFs:

SymbolDescriptionCurrent yieldFees Adjusted Yield
USHYiShares Broad USD High Yield Corporate Bond ETF5.22%0.22%5.44%
SHYGiShares 0-5 Year High Yield Corporate Bond ETF4.99%0.30%5.29%
SJNKBarclays Short Term High Yield Bond ETF4.83%0.40%5.23%
JNKSPDR Barclays High Yield Bond ETF4.79%0.40%5.19%
HYGiShares iBoxx High Yield Corporate Bond ETF4.56%0.49%5.05%
HYSPIMCO 0-5 Year High Yield Corporate Bond Index Fund ETF4.43%0.56%4.99%

Issuing Entities

Exchange traded debt can be issued by various types of entities. Here's a breakout:

Entity Type# of SecuritiesMarket cap%Avg Yield Avg Coupon
Closed end funds4$218,436,4000.4%6.58%6.73%
Common stocks137$37,611,593,16376.9%5.54%5.97%
Mortgage REITs10$602,651,2001.2%6.39%6.78%
Privately held6$1,434,896,6492.9%3.57%7.23%
Total200$48,917,284,398100% 6.40%6.05%

When the entity type is "Privately held", that means that the security was issued by an entity that does not have common shares that are publicly traded on a stock exchange.

Note that there are a lot of exchange traded debt issued by BDCs, closed end funds, MLPs, mortgage REITs and REITs. That makes sense because these types of entities are yield focused entities - many investors buy these entity types because they are looking for a high dividend yield. Issuing debt is one way that these entities can attempt to boost their dividend yield to common stockholders by using a form of leverage.

Here's a breakout of the common stock issuers by GICS sector:

GICS Sector# of SecuritiesMarket cap%Avg Coupon
Communication Services16$7,265,355,96019.3%6.4%
Consumer Discretionary10$3,245,284,9008.6%6.9%
Consumer Staples2$54,450,0000.1%0.0%
Total137$37,611,593,163100% 5.97%

Here's a breakout of the common stock issuers based on the size categories of the issuing company:

Size# of SecuritiesMarket cap%Avg Coupon
Large cap60$24,843,690,74666.1%5.07%
Mid cap51$10,582,405,89728.1%6.33%
Small cap17$1,765,515,0004.7%7.19%
Micro cap9$419,981,5201.1%7.54%
Total137$37,611,593,163100% 5.97%

The above table paints a clear picture that larger companies are perceived to be a better credit risk and therefore can borrow money at a lower interest rate.

ETFs that buy exchange traded debt

There are no ETFs that specifically focus on buying exchange traded debt. But there are a few preferred stock ETFs that are tracking indexes made up of preferred stocks and "hybrid" securities that the index provider considers to be "equivalent" to preferred stocks. So these preferred stock ETFs have an small allocation to exchange traded debt:

SymbolDescriptionInception DateLeverage FactorCurrent YieldActions
PFFiShares Preferred and Income Securities ETF03/26/20071.004.66%Analyze
PGXInvesco Preferred Portfolio ETF01/31/20081.004.97%Analyze
VRPInvesco Variable Rate Preferred ETF05/01/20141.004.21%Analyze

All data is a live query from our database. The wording was last updated: 02/21/2019.

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