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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*
Billions of dollars

Value of all high-yield bonds traded
Billions of dollars

Primary market activity as a share of high-yield bonds traded
Percent

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...

Read more…

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. ...

Read more…

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.

Read more…

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.

Read more…

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).

Read more…

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.

Read more…

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.

Read more…

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. 

Read more…

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.

Read more…

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.

Read more…

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.

Read more…

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.

Read more…

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.

Read more…

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?

Read more…

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.

Read more…

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).

Read more…

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:

Read more…

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.”

Read more…

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.

Read more…

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.

Read more…

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.

Read more…

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:

Read more…

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.

Read more…

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.

Read more…

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.”

Read more…

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.

Read more…

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.

Read more…

TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFixed IncomeInterest RateTrading

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