Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Investors eye cracks in $4.4 trillion U.S. ETF market as virus sell-off rages

Stock MarketsMar 24, 2020 07:15AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Traders work on the floor of the NYSE in New York

By April Joyner

NEW YORK (Reuters) - Wild swings in asset prices have thrown a spotlight on liquidity in corners of the $4.4 trillion market for U.S. exchange-traded funds, which have played a key role for investors in Wall Street's coronavirus-fueled selloff.

So far, ETFs - baskets of securities that are traded like stocks - have mostly functioned as intended, allowing investors to trade or hedge against further declines even during market gyrations.

But trading in certain bond ETFs has begun to reflect evaporating liquidity in recent weeks. Because some bonds trade less frequently than the ETFs that hold them, the ETFs have at times traded at a markedly different price than the value of their underlying assets.

On one hand, the price reflected in the ETF often helps investors gauge the real-time value of underlying assets that trade infrequently or have halted trading, analysts said.

But sparse liquidity could force investors to sell at deep discounts if an extended stock market plunge pushed investors to liquidate ETFs to raise cash - a phenomenon that has been seen in everything from gold to Treasury markets during the selloff.

"I still believe ETFs will work properly," said Spencer Mindlin, capital markets industry analyst at Aite Group in New York. "But they haven't been tested in the environment like the one we're about to enter into."

Trading in ETFs has comprised some 37% of daily volume on U.S. exchanges since Feb. 21, compared with an average of 26% in the year prior to that date, according to State Street (NYSE:STT) Global Advisors, which issues the popular SPDR S&P 500 ETF Trust (P:SPY). Both equity and fixed-income ETFs have traded three times their typical volume over the same period, reflecting the turbulent, high-volume trading seen on exchanges during the recent declines.

Yet liquidity issues in some assets have been reflected in their corresponding ETFs.

Earlier this month, several bond ETFs, including the iShares iBoxx Investment Grade Corporate Bond ETF (P:LQD) and the Vanguard Total Bond Market Index Fund ETF (O:BND), traded at significant discounts to their net asset value.

The price dislocation has persisted in the VanEck Vectors High-Yield Municipal Index ETF (Z:HYD), which on Monday was trading at a 19.5% discount to its net asset value, according to Refinitiv data.

At the same time, ETF issuers have introduced cash redemption fees or raised existing ones in order to offset rising costs for trading certain bonds.

Last week, BlackRock Inc (N:BLK) raised the fees it charges market makers to redeem shares of its iShares Short Maturity Bond ETF (Z:NEAR) for cash. In a similar move last week, Vanguard Group Inc introduced cash redemption fees for the Vanguard Mortgage-Backed Securities ETF (O:VMBS) and the Vanguard Total International Bond ETF (O:BNDX).

Those moves could place a further strain on liquidity, making these ETFs more difficult to trade, said Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, in emailed comments.

Concerns over expenses for cash redemptions contributed to a steep drop in the iShares Short Maturity Bond ETF last week, Bajaj said. The ETF fell 6.2% on Thursday, though it has risen 2.6% over the last two sessions.

Also, borrow fees for several fixed-income ETFs have climbed for investors seeking to sell them short, according to research from market analytics firm S3 Partners, in a potential sign of diminishing supply, which could also contribute to liquidity concerns.

According to Refinitiv's Lipper, bond ETFs registered record weekly outflows last week. In the week ended Wednesday, taxable bond ETFs had $13.2 billion in net outflows, while municipal bond ETFs had $669 million. However, equity ETFs drew $1.9 billion in inflows.

Overall, massive exits from ETFs have not materialized, said Todd Rosenbluth, director of ETF and mutual fund research at CFRA in New York. Recent outflows have been modest compared to the total assets those funds hold, he said.

Investors eye cracks in $4.4 trillion U.S. ETF market as virus sell-off rages
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
st fo
st fo Jan 24, 2021 1:08AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
it was biden in thr bunker with
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email