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US Federal Reserve

SMCCF’s ETF bond buying spree examined

For the first time in its 107-year history, on 23 March this year, the US’s Federal Reserve announced that through its Secondary Market Corporate Credit Facility (SMCCF), it would start buying corporate bond ETFs, a process that actually commenced on 12 May. 

For the first time in its 107-year history, on 23 March this year, the US’s Federal Reserve announced that through its Secondary Market Corporate Credit Facility (SMCCF), it would start buying corporate bond ETFs, a process that actually commenced on 12 May. 

In a comment on the ETF buying programme, Deborah Fuhr, managing partner of ETF data providers ETFGI notes that the Fed is not the first central bank to purchase ETFs as part of a stimulus package.

The Bank of Japan has been purchasing equity ETFs listed in Japan since 2012 as part of its QE programme with The Bank of Japan holding some USD289 billion, roughly 76 per cent of the USD382 billion investment in the ETF industry in Japan.

BlackRock, the world’s largest asset manager and largest ETF issuer, was selected to run the Fed’s three debt-buying programs, with the firm declaring it would waive investment advisory fees on the iShares ETFs it bought on behalf of the Fed.

The Fed reported that between 12 May and 19 May it purchased USD1.58 billion in Investment Grade and High Yield ETFs with a current market value of USD1.307 billion, Fuhr reports.  The purchases have been in 15 fixed income ETFs of which six are High Yield and 11 are Investment Grade.   The majority, some 83 per cent, of the investment has gone into Investment Grade ETFs with the remaining 17 per cent allocated to High Yield ETFs.  

Reporting on ETF assets at the end of April, ETFGI says that the ETFs/ETPs industry in the United Sates had 2,315 ETFs/ETPs, assets of USD4.046 trillion, from 158 providers at the end of April 2020. iShares is the largest ETFs/ETPs provider in terms of assets with USD1.542 trillion, reflecting 38.1 per cent market share; Vanguard is second with USD1.074 billion and 26.5 per cent market share, followed by SPDR ETFs with USD66.06 billion and 16.5 per cent market share. The top three ETF/ETP providers, out of 158, account for 81.1 per cent of global ETF/ETP AUM, while the remaining 155 providers each have less than 6 per cent market share.

In the US at the end of April there were 1,292 products that provided exposure to equity indices with USD2.970 trillion or 73.4 per cent of overall assets, 284 products provide exposure to fixed income indices with USD806 billion or 19.9 per cent of the assets and 84 products provide exposure to commodity indices with 2.5 per cent of the assets (active, leverage, inverse and other products account for the remaining assets).   There are 76 investment grade corporate bond products with assets of USD158.92 billion and 36 high yield corporate bond products with assets of USD47.06 billion, according to ETFGI stats.  

The ETFs the Fed has purchased are managed by five ETF managers, ETFGI reports. There are seven iShares ETFs on the list which represent 48 per cent or nearly half of the USD1.307 billion overall investment.   Vanguard has two ETFs on the list which account for 35 per cent of the assets, there are three SPDR ETFs (SSgA) with 15 per cent, while VanEck and Xtrackers (DWS) each have one ETF with 1 per cent of the overall allocation.  

According to the rules, the SMCCF may purchase 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 US investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to US high-yield corporate bonds, ETFGI writes. The SMCCF will consider several additional factors in determining which ETFs will be eligible for purchase. Those considerations include: the composition of investment-grade and non-investment-grade rated debt, the management style, the amount of debt held in depository institutions, the average tenor of underlying debt, the total assets under management, the average daily trading volume, and leverage, if any.

Interviewed in ETF Express in April, David Mann, head of Capital Markets, Global ETFs at Franklin Templeton commented that the Fed should be buying ETFs of all sizes, otherwise they are de facto supporting the ETF’s stock price.

  • Franklin Templeton comments on Fed’s purchase of investment grade bond ETFs 

“Did the announcement cause some settling of the underlying bond market?” Mann said. “Yes, the Fed’s blanket announcement seemed to create some buying pressure in both investment grade and high yield bond ETFs although now we are explaining ETF premiums instead of ETF 

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