What is exchange traded debt?
Introduction
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".
See our list of exchange traded debt.
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".
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:
| Symbol | Description |
|---|---|
| PFF | iShares Preferred and Income Securities ETF |
| PGX | Invesco Preferred Portfolio ETF |
| VRP | Invesco Variable Rate Preferred ETF |