The recent all-time high discounts seen over the past month have not affected the majority of investors’ appetite for fixed income ETFs, according to a survey conducted by
ETF Stream
.
The survey, which was conducted over the past month, interviewed 50 fund buyers and asset allocators from firms across Europe.
It found 80% of respondents said the discounts had either increased their appetite for bond ETFs or had not changed their view while 20% had a decreased appetite for exposure to the fixed income market through the ETF wrapper.
The wide discounts seen last month came as liquidity dried up in parts of the fixed income market amid concerns about the long-term impact of coronavirus on assets.
Credit was affected the most as 80% of investment-grade corporate bond ETFs traded at all-time high discounts amid the volatility, according to research from Citi.
This led to claims from parts of the investment community that ETFs provide an “illusion of liquidity” to investors by offering easy access to illiquid parts of the market.
However, in periods of illiquidity when the underlying bonds are not trading, ETFs have offered real time pricing compared to the stale net asset value (NAV) which is calculated at the end of the trading day.
For example, LQDE traded more than 1,000 times on exchange and over-the-counter (OTC) on 12 March while its top five holdings traded an average of just 37 times each, according to BlackRock.
One survey respondent said: “[The wide discounts seen] should be no surprise and will always be momentary. We have always believed that ETFs, or any fund for that matter, are only as liquid as the underlying securities.
“If high yield is under question, it does not matter if it is an ETF or a high yield bond fund manager, if redemptions hit, both will face a liquidity issue as high yield is an illiquid market.”
Analysing Europe’s five largest fixed income ETFs during the coronavirus pandemic
One respondent did highlight concerns around trading ETFs during periods of volatility. While bond ETFs reflect the price of the “actual” underlying market, the respondent said the wide bid-ask spreads have made it harder to trade.
“With a bond fund, you can trade at the published NAV, at least until it gets gated!”
Another respondent highlighted how discounts are only an issue if one is trading in the short-term.
“The various product providers have certainly been trying hard to educate people about the bond ETF discounts,” they continued.
“The speed of this downturn has really just caught people by surprise and then when liquidity disappears, I guess we see the result.”
Of the fund buyers surveyed, 19 had a 50% or over-weighting to ETFs in their bond allocation, 11 had between 20%-50%, 16 had under 20% and 4 had a 0% weighting.
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