In Crisis, Fixed Income ETFs Prove Integral to Efficient Bond Market

During multiple periods of market stress over the past decade, the transparency, access, liquidity, and efficiency of on-exchange trading proved valuable to fixed income investors. Yet, certain market participants theorized about what might happen should fixed income ETFs be tested by an unprecedented market shock such as that triggered by the pandemic. Questions persisted about whether ETFs would be able to withstand the pressure of continuous selling, and whether they might exacerbate price declines in the underlying markets.

冲击时,结果很明显:固定的income ETFs not only held up under stress, but they became important tools for market participants. Institutions turned to the most liquid fixed income ETFs as sources of real-time price discovery and cost-efficient execution when transparent quotations and liquidity had sharply deteriorated in individual bonds.

Volatility followed by surge in fixed income ETF trading

投资者have historically increased their use of fixed income ETFs during times of uncertainty, because the funds have shown to be efficient and effective tools for rebalancing holdings, hedging portfolios, and managing risk. During Q1 2020, which saw the onset of the COVID-19 crisis in America, trading in U.S. fixed income ETFs surged to $1.3 trillion – half of the $2.6 trillion for all of 2019.[1]

During volatility jumps, investors want to weigh all their options and have maximum flexibility. Practically speaking, that means they need liquidity, and U.S. corporate fixed income ETFs demonstrated they could provide incremental liquidity to the market as trading rose at a faster rate than trading in individual bonds as credit risk spiked.

Trading volume in all U.S.-listed high yield fixed income ETFs averaged as much as $7.8 billion per day in March 2020 and represented as much as 29% of individual high yield bond trading in the over-the-counter (OTC) market; for comparison, high yield fixed income ETFs averaged around 11% of OTC high yield trading in 2019.[2] The trend was similar in U.S. investment grade corporate bond trading, where fixed income ETFs in March represented as much as 24% of individual investment grade bond trading in the OTC market, compared with 10% in 2019.[3]

In both high yield and investment grade, as markets became more volatile, investors turned to fixed income ETFs.

Fixed income ETFs are indicators of real-time, actionable prices

在2020年初市场波动的高峰期，许多固定收益ETF每天在交易所交易数十亿美元和数万次。[4]这种交易频率比交易最频繁的公司债券高出几个数量级。

3月12日是股市有史以来最糟糕的一天，也是信贷市场大幅抛售的一天，iShares iBoxx美元投资级企业债券ETF（LQD）在交易所交易近9万次，而其最大的5只债券平均交易量仅为37次

From February through April, the iShares iBoxx $ High Yield Corporate Bond ETF’s (HYG) and LQD’s average daily dollar trading volume was 25 times and 7.5 times more per day, respectively, than their five largest bond holdings.[6]

高交易量支持这样一种观点，即在基础债券市场受到挑战之际，固定收益ETF为投资者提供了可操作的价格。固定收益ETF的交易所市场价格反映了绝对值和相对值，有助于投资者了解迅速变化的市场状况。

Because they offer real-time pricing and trade often, fixed income ETFs are central to valuation, portfolio construction and risk management for institutional investors. In particular, fixed income ETFs have emerged as benchmark references for returns, volatility and market sentiment.

More efficient to trade, too

市场波动造成定价的不确定性，并往往转化为所有证券更广泛的买卖价差。在2020年动荡的前几个月转向固定收益etf的投资者发现，不仅实时、可操作的定价，而且交易成本也低于单个债券。

虽然固定收益ETF的买卖价差在这段市场波动期间确实有所增加，但iShares旗舰型固定收益ETF的买卖价差仍然低于各个行业的个别债券和债券组合；从新兴市场到美国国债，流动性最强的iShares固定收益ETF的买卖价差仍然较低相对应的基础债券组合（图4）。

“Fixed income ETFs proved valuable in helping our fund effectively navigate the COVID-19 crisis environment,” says Jeb Burns, CIO, Municipal Employees’ Retirement System of Michigan. “Even as volatility soared, we were readily able to raise cash by selling ETFs in order to meet our plan’s benefit payment needs. We were able to use the liquidity generated from Treasury ETFs to meaningfully allocate to high yield and emerging market debt ETFs during the course of March 2020. Building similar size positions in the cash bond market would have been extremely challenging given the deteriorating liquidity in those markets.”

While fixed income ETF trading costs are generally cheaper than those of the underlying bonds, this difference was magnified during 2020’s market turbulence – yet another signal they are up to the toughest challenges.

etf在实践中：机构采纳研究

During the worst of the market turmoil in February and March 2020, fixed income ETFs became central to the investment decision-making process for a growing number of institutional investors. Given the lack of liquidity and price discovery in the underlying markets, portfolio managers and traders used fixed income ETFs to: understand rapidly changing market conditions; help price individual bonds and portfolios; determine absolute and relative value opportunities that underpin allocation decisions; implement decisions rapidly and efficiently; and hedge unwanted risk. Here are two examples that highlight why and how institutional investors pivoted to fixed income ETFs during the extraordinary market volatility, and how fixed income ETFs are like a technology that can potentially offer flexibility, lower trading costs and the convenience of market access.

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Use case #1: Liquidity management

Buyer:An asset manager elects to use high yield fixed income ETFs for the first time.

Background:Asset managers need liquidity to manage fund subscriptions and redemptions while remaining invested to avoid cash “drag” that can lead to underperformance. The certainty of execution matters most in assets such as high yield bonds, where transacting in individual securities can be time-consuming and expensive.

挑战：在2020年3月，极端波动性减弱liquidity in the high yield market. Fund portfolio managersstruggled to sell bonds to raise cash to meet redemptionrequests. At the same time, as market sentiment turned positive, it was hard to buy enough high yield bonds to keep pace with the rally.

传统方法：Traditionally, high yield bond fund portfolio managerscreated liquidity tiers, or “sleeves,” using the most liquid特定资产类别内的证券和现金包括货币市场基金在内的金融工具。

Fixed income ETF approach:Needing to take quickaction in the context of market volatility, one large asset经理购买了2.5亿美元的HYG。这是第一次time the manager had used a fixed income ETF and didso for liquidity, speed and efficiency.在他们的流动性套筒中使用HYG而不是highyield bonds, this asset manager was able to access bothyield and market beta while maintaining the ability to liquidate, if necessary.

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Use case #2: Strategic Asset Allocation

Buyer:保险公司将投资研究生e corporate fixed incomeETF是他们投资组合的核心。

Background:寿险公司处理大量保费现金流every day. Their businesses depend on quickly and efficiently investing such cash flows at high enough yield to meet their liability obligations.

挑战：Finding individual investment grade bonds was difficult because liquidity and new issuance dried up in February and March 2020. During this time, bid/ask spreads for investment grade bonds widened from about 25bps to over 100bps, in price terms, while LQD’s bid/ask spread stayed below 2bps over the same period.[7]

传统方法：传统上，保险公司严重依赖个人投资级债券进行负债匹配，通常是通过投资于新发行的债券，这些债券往往具有很高的流动性。

Fixed income ETF approach:一家美国大型保险公司面临着破产的前景持有太多现金收入太少。To help remedy this mismatch, the insurer invested inthe highly liquid LQD.