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ARCHIVE
ETFs Are Passing the COVID-19 Crisis Test
By Shelly Antoniewicz
March 17, 2020
Financial markets have continued to churn since our previous post, which examined mutual fund investors’ initial reactions to the COVID-19 crisis, with the S&P 500 index and yield on the 10-year Treasury bond gyrating wildly.
How have exchange-traded funds (ETFs) weathered the intensifying financial market fallout from the pandemic? In short, even with volatile prices and widening bid-ask spreads in stock and bond markets, trading of ETF shares has been orderly and has contributed to price discovery in the first weeks of March. In addition, net ETF share creations and redemptions, although varying by asset class, have been modest.
Trading in ETF Shares on Stock Exchanges Has Been Orderly
ETFs provide a mechanism for investors to transfer risk and hedge their exposures quickly and efficiently. Under normal market conditions, trading in ETF shares usually accounts for between 25 to 30 percent of all daily US stock market trading volume in dollars. But during stressed events, we often see investors turn to ETFs. That’s happening now: in the first two weeks of March, daily trading in ETFs consistently exceeded 30 percent of total dollar volume and, for several days, was closer to 40 percent (Figure 1).
Figure 1
Investors Use ETFs to Quickly and Efficiently Transfer and Hedge Risks in Stressed Markets
Billions of dollars; daily, March 2–March 13, 2020
Sources: Investment Company Institute, Bloomberg, and Cboe Exchange, Inc.
ETFs Have Contributed to Price Discovery
Trading in ETFs can help market participants determine market-clearing prices for underlying stocks and bonds more quickly and accurately. For example, on March 9 and March 12, US equity futures trading was suspended as futures on the S&P 500 index fell 5 percent and hit “limit down” prior to the opening of the US stock exchanges. On both these days, several ETFs that track the S&P 500 index continued to trade in the premarket and the subsequent changes in their share prices—a reflection of market participants’ evolving views—closely matched the change in value of the S&P 500 index at the opening of the stock exchanges.
Net Creations and Redemptions of ETF Shares Have Been Modest
Domestic equity ETFs are estimated to have had inflows (net creations of shares) on eight out of the first 10 trading days of the month, with a cumulative total of $26 billion (Figure 2). The vast majority of domestic equity ETFs conduct in-kind transactions—creating and redeeming primarily in baskets of securities, not in cash. So these inflows required market participants to buy stocks to assemble the ETF creation baskets—thus supporting the underlying market.
Figure 2
Domestic Equity ETFs Received Inflows in First Two Weeks of March
Millions of dollars; daily, March 2–March 13, 2020
Sources: Investment Company Institute and Bloomberg
The three major categories of bond ETFs (government, investment grade corporate, and high yield) are estimated to have had inflows of about $1 billion from March 2 through March 13 (Figure 3). Likely reflecting a substantial widening in credit spreads and a move to quality by investors, inflows to government bond ETFs ($10 billion) more than offset outflows from investment grade bond ETFs ($7 billion) and high-yield bond ETFs ($1.5 billion). The shift away from investment grade credit exposure, however, was modest, as the $7 billion in outflows from investment grade bond ETFs represented only 1.7 percent of the assets in these funds as of the end of January.
Figure 3
Inflows to Government Bond ETFs Offset Outflows from Corporate Bond ETFs in First Two Weeks of March
Millions of dollars; daily, March 2–March 13, 2020
Sources: Investment Company Institute and Bloomberg
High-yield bond ETFs had mild outflows totaling only $1.5 billion (2.2 percent of January assets) in the first two weeks of March. Indeed, primary market activity of high-yield bond ETFs—creations and redemptions that directly involve underlying high-yield bonds—accounted for a small share of the daily trading that occurred in high-yield bonds from March 2 through March 13 (Figure 4). Even on March 3, when high-yield bond ETFs had $1.8 billion in estimated primary market activity, these transactions represented less than 10 percent of total dollar volume traded in underlying high-yield bonds.
Figure 4
Primary Market Activity of High-Yield Bond ETFs Was a Small Share of High-Yield Bond Trading
Date |
High-yield bond ETF primary market activity* |
Value of all high-yield bonds traded |
Primary market activity as a share of high-yield bonds traded |
Mar 2 |
$1.3 |
$17.0 |
7.6% |
Mar 3 |
1.8 |
18.5 |
9.7 |
Mar 4 |
1.0 |
20.6 |
4.9 |
Mar 5 |
1.4 |
20.9 |
6.7 |
Mar 6 |
1.1 |
16.1 |
6.8 |
Mar 9 |
0.8 |
15.6 |
5.1 |
Mar 10 |
1.4 |
18.4 |
7.6 |
Mar 11 |
0.5 |
19.4 |
2.6 |
Mar 12 |
0.4 |
19.1 |
2.1 |
Mar 13 |
0.5 |
17.4 |
2.9 |
*Primary market activity is estimated as the sum of creations and redemptions.
Sources: Investment Company Institute, Bloomberg, and FINRA
Overall, in the past two weeks, ETFs have acted as a relief valve for the underlying stock and bond markets by allowing investors to gain or shed risk exposure to various asset classes. ETFs did not experience mass redemptions, nor did they create any knock-on effects in the underlying markets.
We have often heard that ETFs haven’t really been tested. So far, despite the COVID-19 pandemic, it looks like ETFs are healthy and robust.
Shelly Antoniewicz is senior director of financial and industry research at ICI.
Permalink: https://www.ici.org/viewpoints/20_view_etfscovid
TOPICS: Equity InvestingExchange-Traded FundsFinancial MarketsFinancial StabilityIndex FundTrading
Fund Investors Will “Run”? Sorry, Charlie Brown
By Sean Collins and Sarah Holden
March 7, 2018
For decades, Charles Schulz kept us in suspense: surely this time, Lucy would let Charlie Brown kick the football. Nope. Every time, at the last second, she pulled the ball away—and Charlie Brown fell flat on his back.
We’ve seen the same gap between wish and fulfillment around market turmoil and mutual funds. For decades, commentators have predicted that investors in stock and bond funds, faced with market turmoil, would redeem en masse, perhaps adding to the market turmoil. Despite plenty of opportunities, that just hasn’t happened.
Stock market turmoil in February provides yet another example of this...
TOPICS: 401(k)Bond FundEquity InvestingFinancial MarketsFinancial StabilityInterest RateInvestor ResearchMutual FundRetirement ResearchTrading
Pointing Fingers at Index Funds Won’t Explain Market Volatility
By Shelly Antoniewicz
February 14, 2018
With all the recent volatility in the US stock market, two questions are frequently being asked:
- Are fund investors fleeing the stock market?
- Are index funds causing market turbulence?
The short answer to both questions is no.
Experience and research show that investor flows to and from mutual funds and exchange-traded funds (ETFs) tend to track market returns. ...
TOPICS: Equity InvestingExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityIndex FundInterest RateInvestor ResearchMutual FundTrading
Congress Must Spike “FIFO” for All Investors
By Paul Schott Stevens
December 8, 2017
As the House and Senate reconcile their differing versions of tax reform, one provision from the Senate’s bill should be deleted immediately. Tax reform must not impose an accounting system known as “first-in, first-out” (FIFO) that would deprive America’s investors of their long-standing ability to manage their finances for the greatest tax efficiency.
TOPICS: Fund RegulationGovernment AffairsMutual FundRetirement PolicyTaxesTrading
A Proposal that Should Be Popped
By Paul Schott Stevens
December 15, 2016
The following ICI Viewpoints is a letter to the editor by Paul Schott Stevens, president and CEO of the Investment Company Institute, in response to an op-ed published on December 7, 2016, in the New York Times, “A Monopoly Donald Trump Can Pop.”
Millions of Americans could lose the low costs and broad diversification of fund investing under the dangerous proposal outlined in the op-ed by Posner, Weyl, and Morton.
TOPICS: Bond FundEquity InvestingExchange-Traded FundsFinancial MarketsFund RegulationMutual FundTrading
US T+2 Is Coming—and Bringing Many Benefits with It
By Ahmed Elghazaly
September 6, 2016
On September 5, 2017, equities, municipal and corporate bonds, and unit investment trusts will reduce the amount of time it takes to settle trades from trade date plus three days (T+3) to trade date plus two days (T+2).
TOPICS: Financial MarketsMutual FundOperations and TechnologyTrading
Conducting Business in a Rapidly Changing World
By Jeanne Arnold
June 1, 2016
The global operating environment is evolving and it is critical for corporations to understand the changes afoot if they are to succeed in the 21st century, said Kevin Kajiwara, co-president of Teneo Intelligence, a division of global advisory firm Teneo. Speaking on the final day at ICI’s 58th General Membership Meeting (GMM), Kajiwara gave an overview of the economic and political shifts taking place around the world during his session, “Geopolitical Risks and the Global Economy.” After the overview, he engaged in an insightful question-and-answer session with Tom Faust, chairman and CEO of Eaton Vance Corp.
TOPICS: EuropeGMMInternationalMutual FundTrading
All Pain and No Gain for Fund Investors
By Paul Schott Stevens
February 5, 2016
The following is a letter submitted to the editor of the New York Times. A financial transaction tax (FTT) (editorial, The Need for a Tax on Financial Trading, Jan. 28) is a terrible idea that would harm all investors, especially American workers saving for retirement. We have yet to see an FTT proposal that would not hurt Main Street nor weaken our capital markets.
TOPICS: Financial MarketsMutual FundOperations and TechnologyShareholderTaxesTrading
Liquidity Risk Management Must Be Done Right
By Paul Schott Stevens
January 15, 2016
The following ICI Viewpoints is a lightly edited version of a letter that ICI President and CEO Paul Schott Stevens sent to U.S. Securities and Exchange Commission (SEC) Chair Mary Jo White, as part of the Institute’s overall response to the SEC’s liquidity risk management proposal.
TOPICS: Financial StabilityFund GovernanceFund RegulationInternationalMutual FundOperations and TechnologyShareholderTrading
How the SEC’s Six-Bucket Approach Could Provide a False Picture of Liquidity
By Brian Reid
January 14, 2016
As I explained in a previous post, I filed a letter on January 13 with the U.S. Securities and Exchange Commission (SEC) in response to its liquidity risk management proposal and to Liquidity and Flows of U.S. Mutual Funds, a study by the Commission’s Division of Economic and Risk Analysis (DERA). My letter was one of four components of ICI’s multipart response to the SEC proposal.
TOPICS: Financial StabilityFund GovernanceFund RegulationInternationalMutual FundOperations and TechnologyShareholderTrading
The SEC’s Liquidity Proposal: Good Goals, Unintended Consequences
By Brian Reid
January 13, 2016
On January 13, I filed a letter with the U.S. Securities and Exchange Commission (SEC), in response to the SEC’s liquidity risk management proposal and to Liquidity and Flows of U.S. Mutual Funds, a study by the SEC’s Division of Economic and Risk Analysis (DERA). My letter was one of four components of ICI’s multipart response to the SEC proposal.
TOPICS: Financial StabilityFund GovernanceFund RegulationInternationalMutual FundOperations and TechnologyShareholderTrading
High-Yield Bond Mutual Fund Flows: An Update
By Sean Collins
December 23, 2015
In an ICI Viewpoints on December 16, we debuted new weekly data on flows to high-yield bond mutual funds, presenting data through December 9. In light of continuing developments in the high-yield market, we have had requests to provide an update this week, taking into account the flows through December 16. Here is our overview.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityInterest RateMutual FundTrading
High-Yield Bond ETFs: A Source of Liquidity
By Shelly Antoniewicz
December 22, 2015
The high-yield bond market has been buffeted recently, as market participants reassessed the risks of this sector and sent prices for many such bonds tumbling.
TOPICS: Bond FundExchange-Traded FundsFinancial MarketsFinancial StabilityInterest RateMutual FundTrading
High-Yield Bond Mutual Fund Flows: Some Perspective
By Sean Collins
December 16, 2015
Recent conditions in the high-yield credit markets have raised questions about the impact of market turmoil on mutual funds investing in that segment of the bond market.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityInterest RateMutual FundTrading
Mutual Fund Investments in Private Placements: an Overview
By Gregory M. Smith
November 23, 2015
Given recent media interest in mutual fund investments in private placements, it might be helpful to review mutual fund disclosure and valuation obligations. How do funds handle securities that are not publicly traded?
TOPICS: Bond FundEquity InvestingFund GovernanceFund RegulationInvestment EducationMutual FundOperations and TechnologyTrading
Opinion: The Tax Threat to Your Mutual Fund
By Mike McNamee
May 7, 2015
Vanguard Chairman and CEO Bill McNabb sent “an open letter to all mutual fund investors” in the opinion pages of Thursday’s Wall Street Journal. His message: fund investors face a clear threat of higher costs, weaker returns, and a bailout tax to salvage other failing financial institutions—all if regulators get their way in imposing new rules on funds or their managers.
TOPICS: 401(k)Federal ReserveFinancial MarketsFinancial StabilityFund RegulationMutual FundRetirement PolicySavingsShareholderTradingTreasury
2015 Investment Company Fact Book: Letter from the Chief Economist
By Brian Reid
May 4, 2015
A version of this letter by ICI Chief Economist Brian Reid was released today in our 55th edition of the Investment Company Fact Book.
This year marks the 75th anniversary of the Investment Company Act and the Investment Advisers Act—the key statutes under which mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts are regulated and governed. In 1940—the same year that Congress enacted these laws—the fund industry formed the National Committee of Investment Companies, the trade group that became the Investment Company Institute (ICI).
TOPICS: Financial MarketsFinancial StabilityFund RegulationInvestor ResearchPolicy ResearchRetirement ResearchTrading
ICI Global Welcomes the Announcement of More Stock Connects in Asia Pacific
By Qiumei Yang
April 22, 2015
In response to the announcement about a launch date for the Taiwan Stock Exchange and Singapore Exchange trading link, and recent reports of a possible Shenzhen–Hong Kong Stock Connect, ICI Global’s Qiumei Yang offers the following comment:
TOPICS: ICI GlobalInternationalTrading
More Unfounded Speculation on Bond ETFs and Financial Stability
By Shelly Antoniewicz and Mike McNamee
April 13, 2015
A recent column in the Financial Times warns of “another accident in waiting” in the growth of fixed-income exchange-traded funds (ETFs)—described as “financial alchemy” that converts illiquid bonds into “baskets” that “trade moment to moment on the stock exchanges.” This “illusory” ETF liquidity will disappear, the author warns, when investors “want to move en masse, and quickly, when the going gets less good.”
TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeInterest RateTrading
Once Again, Information Moves Markets
By Sean Collins
March 18, 2015
Treasury yields fell sharply today and the stock market jumped. Wouldn’t it be nice if mutual funds could take credit? Unfortunately, they can’t. Any orders that mutual fund investors place to buy or sell shares anytime today before 4:00 p.m. won’t hit the market until 4:00 p.m., just like any other day. And, if you are reading this blog post at the time of its posting, 4:00 p.m. is still 10 minutes away.
TOPICS: Bond FundFederal ReserveFinancial MarketsFinancial StabilityInterest RateMutual FundTrading
Does Liquidity in ETFs Depend Solely on Authorized Participants?
By Shelly Antoniewicz and Jane Heinrichs
March 16, 2015
ICI recently conducted a survey of its members that sponsor exchange-traded funds (ETFs) to collect information on authorized participants (APs)—typically market makers or large institutional investors with an ETF trading desk that have entered into a legal contract with an ETF to create and redeem shares of the fund.
TOPICS: Exchange-Traded FundsFinancial MarketsFinancial StabilityTrading
Plenty of Players Provide Liquidity for ETFs
By Shelly Antoniewicz
December 2, 2014
A recent article in the Financial Times’ FT Alphaville blog (“Lies, Damned Lies, and Liquidity Expectations”) focused on a paper published by the Committee on the Global Financial System, an organization that monitors developments in global financial markets for central bank governors.
TOPICS: Exchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityInternationalTrading
Bloomberg Ignores the Evidence on Bond ETFs
By Mike McNamee
September 26, 2014
In response to “Pimco ETF Probe Spotlighting $270 Billion Market Vexing FSB,” we posted the following comment on Bloomberg News’ website:
TOPICS: Bond FundBondsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationInterest RateInternationalTrading
A Look Inside ETFs and ETF Trading
By Rochelle Antoniewicz and Jane Heinrichs
September 23, 2014
Investors in exchange-traded funds (ETFs) are trading shares with each other far more than they are turning to authorized participants to create or redeem shares.
TOPICS: Exchange-Traded FundsFinancial MarketsFinancial StabilityMutual FundTrading
The Real Lessons to Be Learned from 1994’s Bond Market
By Brian Reid
July 29, 2014
A recent “Heard on the Street” column in the Wall Street Journal (“Heeding 1994's Bond-Market Lesson,” July 27, 2014) is correct in saying that there’s a lesson to be learned from the 1994 bond market—but it draws the wrong lesson.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateMutual FundRetirement ResearchSavingsTradingTreasury
SEC Chair White Stresses Need for FSOC to Consult Sources for Necessary Expertise
By Rachel McTague
May 22, 2014
Securities and Exchange Commission (SEC) Chair Mary Jo White today called for the U.S. Financial Stability Oversight Council (FSOC) to use outside expertise to the degree necessary in its process of designating systemically important financial institutions (SIFIs). She asserted that it is “enormously important for FSOC, before it makes any decision of any kind, to make sure it has the necessary expertise on any of those issues.”
TOPICS: EventsFederal ReserveFinancial MarketsFinancial StabilityFund GovernanceFund RegulationGMMGovernment AffairsMoney Market FundsMutual FundOperations and TechnologyShareholderTradingTreasury
“Market Tantrums” and Mutual Funds: A Second Look
By Sean Collins and Chris Plantier
May 19, 2014
Over the past year, policymakers who are focused on financial stability have pursued a theory that mutual fund investors can destabilize financial markets by redeeming from funds when markets decline. According to this theory, redemptions by fund investors lead fund managers to sell securities; those sales drive asset prices down further and, in turn, spur more investor flight, redemptions, and price declines.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateInvestor ResearchMutual FundTradingTreasury
ETFs Don’t Move the Market—Information Does
By Shelly Antoniewicz
March 11, 2014
There they go again.
TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFixed IncomeInterest RateTrading
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