Within the realm of fixed income, different indices have evolved to serve different objectives. For example, the iBoxx USD High Yield Developed Markets Index measures USD-denominated high yield corporate debt from developed countries. The benchmark is weighted by market cap to reflect the true distribution of bond and issuer sizes and their availability in the market.
However, as tradable ecosystems evolve, benchmarks have emerged that are fit for unique purposes. iBoxx Liquid Indices are designed to underlie and facilitate tradable products like exchange-traded funds (ETFs), total return swaps (TRS) and futures. The iBoxx USD Liquid High Yield Index and the iBoxx USD Liquid Investment Grade Index were initially designed to underlie ETFs, focusing on the most-liquid bonds in their category. As activity in the ETFs tracking these indices grew, standardized total return swap markets evolved around them. More recently, new, closely related indices were launched to support corporate bond futures, which we will discuss later in this report. First, let’s define the methodology behind these iBoxx Liquid Indices.
Unlike broader USD corporate bond benchmarks, the iBoxx Liquid Indices have a higher minimum par amount for a bond to be eligible for inclusion. They also instill unique issuer size criteria to ensure that an issuer is large enough to trade readily in its bonds. Furthermore, the iBoxx Liquid Indices have minimum runs and lockout periods. Minimum runs require that any bond entering the index must remain for at least six months (provided, in the case of the iBoxx USD Investment Grade Liquid Index, for example, it is not downgraded to sub-investment grade, defaulted or fully redeemed), while lockout periods exclude bonds that drop out of the index from re-entering for a three-month period. Together, these features reduce portfolio churn, limiting arbitrary trading activity and the trading fees incurred by the index.
Exhibits 1 and 2 summarize the key rule adjustments required to move from an iBoxx Benchmark to an iBoxx Liquid Index.
