Why ETFs have been a lifesaver for bond investors

Figures on recent trading activity affirm funds' crucial function amid stressed environments

Why ETFs have been a lifesaver for bond investors

Price disjoints between bond ETFs and their underlying fixed-income securities amid recent volatility have dredged up questions about their effectiveness during market stress. But according to experts from BlackRock, they did just fine — and were actually instrumental for fixed-income investors who were otherwise lost at sea.

“Amid the greatest market turbulence in over a decade, ETFs have been a source of stability,” wrote Barbara Novick, the firm’s vice chairman and co-founder, and Samantha Merwin, head of Markets Advocacy for ETF & Index Investing (EII) Markets & Investments.

In a blog post published by the CFA Institute, the two noted how between February 24 and March 27 — the most volatile period in the recent bond sell-off — many investors relied on ETFs to adjust positions and manage risk in their portfolios. This follows a pattern from past scenarios of market stress, during which trading activity tended to rise with market volatility.

Citing data from BlackRock and Bloomberg, the two said that trading in U.S.-listed ETFs amounted to nearly US$6.4 trillion, while single-stock trading totalled nearly US$11 trillion. That means over the recent window of turbulence, ETFs represented 37% of all equity trading, whereas they accounted for 27% in 2019.

“US-listed ETFs traded almost $256 billion per day on average, roughly three times their average 2019 daily trading volume,” they said, adding that ETF trading volumes within the U.S. hit a record US$1.4 trillion.

Novick and Merwin also highlighted the crucial role ETFs played as liquid trading instruments, particularly when it comes to price discovery.

“Because of this liquidity, fixed-income ETF prices incorporate more real-time information than even their most heavily traded portfolio bonds,” they said. “The NAV is an estimate of the fair value of the underlying holdings, … [While] the ETF price shows what investors are actually willing to pay.”

And while critics may doubt the ability of ETFs to withstand market stress, Novick and Merwin argued that the recent environment demonstrated bond ETFs’ worth, just like the 2008 global financial crisis, the 2013 taper tantrum, and the 2015 high-yield bond selloff.

“ETFs have been tested time and time again. And each time, they have passed the test,” they said.


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