The US Federal Reserve announced it would buy exchange-traded funds (ETFs) as part of a range of measures to help support the markets in the wake of the coronavirus. David Mann, Head of Capital Markets, Global ETFs, examines which ETFs it might actually buy, and when.
In my last blog post, I discussed the Federal Reserve’s (Fed’s) Secondary Market Corporate Credit Facility, which included ETFs that provide exposure to investment-grade corporate bonds. More than a week later, the million-dollar question of “which ETFs?” remains unanswered.
The Fed’s announcement that it was going to buy ETFs is certainly a topic of interest within the ETF industry, as judged by the higher-than-normal amount of questions and comments I received. Interestingly, many of the comments were less about which ETFs and more focused on when the Fed would act.
As I went through the “when” scenarios, let’s imagine the two extreme scenarios of when the Fed would buy ETFs. As a reminder, we estimate around $140 billion of assets under management (AUM) across 60 funds that meet the Fed’s eligibility criteria.
Extreme option 1: There is a massive amount of simultaneous selling pressure ($28 billion) across ALL eligible ETFs. The Fed acts in reaction to this selling pressure by buying ETFs.
Extreme option 2: There is zero selling pressure in the market, and the Fed decides to buy $28 billion of ETFs.
Admittedly, my last post was written in the mindset that the Fed’s program would be proactive in its approach (closer to option 2). I would argue that the market thought so as well—the week of the announcement saw the top five ETFs that provide exposure to investment-grade bonds bring in around $6 billion in assets.
Furthermore, those funds had an average premium to net asset value (NAV)1 of almost 1.5% on the back of almost $40 billion of notional volume. Those actions reflect a market that expects a big buyer to enter sometime soon. We will have more on this in our next post.