Wall Street is changing how it trades the world's hottest investment product

Traders
in the Standard & Poor's 500 stock index options pit at the
Chicago Board Options Exchange (CBOE) fill orders shortly before
the close of trading on October 28, 2015 in Chicago,
Illinois.Scott
Olson/Getty

Bond exchange-traded funds have exploded in size in the last few
years. The big ticket trades in them are getting bigger too.

Exchange-traded funds were originally launched as a vehicle for
stocks, and they've been attracting assets at a fast clip in
recent years. The combined assets of US
ETFs stood at $2.7 trillion in February, according to
the Investment Company Institute, of which $457.4 billion was
in bond ETFs.

A growing chunk of the trading in these bond ETFs is now in large
sizes, with the percentage of bond ETF block trades doubling over
the past six years.

Close to $1 in every $4 of bond ETFs traded part of a block
trade, according to Credit Suisse. While blocks are commonly
defined as those exceeding 10,000 shares or $200,000 in total
value, the average bond ETFs block trade was $812,000 per
trade in 2016, and $852,000 in the first two months of 2017.

Perhaps unsurprisingly, fixed income is also leading growth
in block trades larger than 100,000 shares, which have seen
their share climb seven percentage points over the past
seven years to 17%. Bond funds currently account for
about 40% of the large trades of more than 100,000 shares, up
from less than 10% in 2010, Credit Suisse data show.

As an extension of that, 17 of the 20 ETFs most
frequently traded in blocks are bond-related. The
explanation offered by Credit Suisse is that the bond market is
less transparent, which hampers the efforts of traders
who use computer-based trading models to transact. As a
result, the securities are traded in larger chunks.

Credit
Suisse

Credit Suisse also cites the adoption of fixed income
funds by institutional investors, whose
adoption of ETFs in general has surged. The
popularity of bond ETFs specifically has at least partially
stemmed from a prolonged period of low interest rates.

By boasting attractive yields, bond ETFs have been used by
investors as an alternative to investments such as money markets
funds, which can offer lower returns.

Further, while liquidity in the cash market has gotten
tight, ETFs provide investors a handy way to easily move in and
out. Bond funds are also used by firms to smooth out holdings in
separately managed accounts, according to Credit Suisse.

Block trading in ETFs across all asset classes totaled more than
$3 trillion in 2016 for the third straight year, according to the
firm, which projects similar levels for full-year 2017.