Despite some of the aforementioned market quality and price dislocations during the COVID-19 pandemic, ETFs provided investors with liquidity when they needed it most. A number of institutions — such as central banks, stock exchanges and regulators — were instrumental in ensuring global markets and their infrastructures performed well. With new policies and users entering the scene, the road ahead for ETFs looks promising.
ETFs have proven to be an effective tool for central banks to tap into liquidity and support the market. Dating back to 2010, the Bank of Japan (BOJ) purchased ETFs to support the equity markets, without having to transact in individual securities.
In response to the market volatility and liquidity constraints during COVID-19, the BOJ increased its ETF purchases to more than 1.5 trillion yen ($14 billion) in March 2020.
Additionally, on April 30, 2020, the BOJ changed a rule within its program to link its purchases of ETFs to the amount of each stock available in the market. After having announced in 2019 that it would lend their ETF holdings to investors, the BOJ has now taken an additional step to improve liquidity in the market and minimize potential drawbacks to their ETF purchasing program.
On March 23, 2020, in an effort to offer stability and improve liquidity in the corporate credit market, the Fed announced that it would purchase corporate debt through a Primary Market Corporate Credit Facility (PMCCF). The Fed also stated that it would support market liquidity for corporate debt through a Secondary Market Corporate Credit Facility (SMCCF) by purchasing individual corporate bonds and ETFs in the secondary market.
The SMCCF began its ETF purchases on May 12, 2020 through a special purpose vehicle (SPV). The SPV initially received a $25 billion equity investment from the Department of Treasury, which can then be leveraged to a maximum size of $250 billion.
Eligible ETFs for the SMCFF include US-listed ETFs “whose investment objective is to provide broad exposure to the market for US corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.”1
Despite the extraordinary market volatility and liquidity challenges during the COVID-19 crisis, the equity market structure performed well.
In the US, equity market structure enhancements that were implemented following the “flash crash” of May 6, 2010 and refined since the market events of August 24, 2015 helped to ensure that investors were able to trade ETFs with a high degree of confidence during the pandemic. The US equity market-wide circuit breaker mechanism was triggered four times and performed as designed. Additionally, several regulators and stock exchanges around the globe enhanced their processes and implemented new regulations to adapt to the COVID-19 crisis and improve market resilience amid extreme volatility. These changes include:
Overall, the measures implemented by exchanges and regulators were instrumental in promoting fair, orderly and resilient markets during the COVID-19 crisis. In the ETF space in particular, actions taken by exchanges to allow for more flexibility in terms of market-making obligations allowed market makers the ability to continue providing liquidity to investors.
The COVID-19 pandemic brought unprecedented challenges to markets across the globe, impacting liquidity across nearly all investment vehicles and asset classes. Despite these challenges, ETFs functioned as designed, providing market participants with liquidity when they needed it most. The staggering trading volumes during March 2020 illustrate how investors gravitated toward ETFs during periods of stress, with US-listed ETFs trading more than $15 trillion during the first five months of 2020, or 70% of their trading volumes in 2019.
Given the important role that ETFs continue to play in providing liquidity and price transparency to the marketplace, particularly during stressed markets, we expect to see ETF adoption continue to rise and assets continue to grow.
1Federal Reserve Bank of New York as June 15, 2020.
Measures the volatility of a security or portfolio in relation to the market, with the broad market usually measured by the S&P 500 Index. A beta of 1 indicates the security will move with the market. A beta of 1.3 means the security is expected to be 30% more volatile than the market, while a beta of 0.8 means the security is expected to be 20% less volatile than the market.
The process by which ETF shares are created and redeemed. The creation process involves authorized participants (APs) buying underlying shares and delivering those shares to the fund sponsor in exchange for equally valued ETF shares. The redemption process is the reverse, wherein the AP removes ETF shares from the market and exchanges those ETF shares with the ETF sponsor for an equally valued amount of the ETF’s underlying shares.
Equitizing cash is putting cash or equivalent assets to work in the stock market, often temporarily, with relatively liquid vehicles, including ETFs.
ESG Investing, or Environmental, Social and Governmental Investing
A set of criteria that investors can use to screen investments. Environmental criteria look at how a company performs as a steward of the natural environment; social criteria examine how a company manages relationships relevant to its operations; and governance criteria deal with a company’s leadership, executive pay, audits and internal controls, and shareholder rights.
A term that describes the extent to which investors have easy access to objective financial information about companies or funds such as ETFs. Those data include price movements, market depth and audited financial reports.
Investing involves risk including the risk of loss of principal.
State Street Global Advisors and its affiliates (“SSGA”) have not taken into consideration the circumstances of any particular investor in producing this material and are not making an investment recommendation or acting in fiduciary capacity in connection with the provision of the information contained herein.
The views expressed in this material are the views of SPDR Americas Research 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.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Brokerage commissions may apply and would reduce returns. Please see the fund’s prospectus for more details.
Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
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.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress. Diversification does not eliminate the chance of experiencing investment losses.