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ETFs support the Fed’s goal by providing broad market access to a diverse set of firms through a single investment, trading flexibility and transparency.
Details on the size and scope of the program have not been finalized, but we can glean some insights about what may be in focus.
On March 23, in an effort to offer stability and improve liquidity in the corporate credit market, the US Federal Reserve (Fed) announced that it would begin purchasing individual bonds of US investment-grade-rated firms with a maturity of five years or less, as well as broad corporate bond ETFs. Bond and ETF shares will be purchased under the Federal Reserve Secondary Market Corporate Credit Facility (SMCCF), with $10 billion of capital allocated by the US Treasury.
Why ETFs?
The Fed’s goal of injecting liquidity into the corporate credit market can be supported by the use of ETFs, as they provide broad market access to a diverse set of firms through a single investment.
Notably, we do not view the Fed purchasing ETFs as a way to abate any perceived stress in the fixed income ETF marketplace. If that were the Fed’s goal, the scope of its purchase would be broader than a group of corporate bond ETFs that make up only 19% of fixed income ETF assets.1
Rather, we believe that the Fed is including broad investment-grade corporate bond ETFs within the SMCCF program because ETFs are:
The Known Knowns
Similar to other stimulus actions in prior crisis periods, this program was announced pending full implementation details. For example, there are outstanding questions on the potential use of leverage to increase the stimulus provided. As a result, the size of the program has not yet been confirmed by policy officials. However, based on market insight4 and the fact that the Fed can lend roughly 10 times what it holds in collateral for non-government securities, the size of the program could be as large as $100 billion. Here’s what we know now about the ETF purchase criteria:
The Known Unknowns
Back-of-the-envelope math using the above constraint of being able to purchase only 20% of an ETF’s assets would indicate that roughly $30 billion of corporate bond fixed income ETF assets could be purchased.5 However, even that number may differ from what is in scope, as our calculations include all indexed-based funds focused on US bonds, some of which are likely too niche or narrow of a focus for consideration (e.g., rate hedged, ESG, specific year focused). There are two additional open items:
Despite all of this uncertainty, we can glean some potential ETF options that the Fed may use, based on our interpretation of the constraints as well as our ETF market insights.
The top 7 ETFs, by assets, that could be part of the purchase program are listed out by issuer below:
| Ticker | Name | Firm | # of Holdings |
| SPSB | SPDR Portfolio Short Term Corporate Bond ETF | State Street | 1,165 |
SPIB |
SPDR Portfolio Intermediate Term Corporate Bond ETF | State Street | 3,934 |
| VCIT | Vanguard Intermediate-Term Corporate Bond ETF | Vanguard | 1,853 |
| VCSH | Vanguard Short-Term Corporate Bond ETF | Vanguard | 2,275 |
| LQD | iShares iBoxx $ Investment Grade Corporate Bond ETF | BlackRock | 2,003 |
| IGSB | iShares Short-Term Corporate Bond ETF | BlackRock | 2,516 |
| IGIB | iShares Intermediate-Term Corporate Bond ETF | BlackRock | 2,107 |
Source: State Street Global Advisors, SPDR ETFs as of 03/27/2020.
As more details unfold, we will continue to assess implementation by the SMCCF and share our insights.
1 Based on any ETF listed as investment-grade corporate per Bloomberg Finance L.P., as of 03/27/2020. Calculations by SPDR Americas Research.
2 Bloomberg Finance L.P., as of 03/27/2020.
3 Depending on the issuer, some funds holdings may or may not be updated on a daily basis.
4 “The Fed’s new credit programs,” J.P. Morgan North America Credit Research, 03/23/2020.
5 Calculations are based on removing any active, non-US-focused corporate bond ETFs and then applying a 20% constraint to the current asset levels.
The views expressed in this material are the views of Matthew Bartolini through the period ended March 30th, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal. Past performance is no guarantee of future results.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
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