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Weathering the Storm

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April 2022

During the most volatile month for the S&P 500 market in history and the worst since the financial crisis for bonds,1 March 2020 saw liquidity dry up, exchange-traded fund (ETF) spreads widen and trade at a discount to their net asset values (NAVs). But with unprecedented support for markets from the Federal Reserve (Fed), the situation was relatively short-lived. By mid-April, ETF experts from across BNY Mellon Investment Management got together with Stephanie Pierce, CEO of ETF, Index and Cash Investment Strategies at BNY Mellon Investment Management, and discussed the situation and how they believe the ETF industry may have changed as a result.

Participants in the discussion included: Dragan Skoko, head of Trading and Trade Analytics, Mellon; Paul Benson, head of Fixed Income Efficient Beta, Mellon; and Jason Ronca, ETF capital markets specialist, BNY Mellon Investment Management.

How did the March market volatility express itself in the ETF landscape?

Market makers create or redeem shares in order to close the distance between the market price of the ETF and its NAV. For example, in times of heavy selling, market makers have excess inventory, and they redeem those shares to bring the share price back in line with the underlying NAV. Market makers also like to take advantage of the price dislocation between the price and NAV. When the price trades at a premium or a discount to the value of the underlying securities, there can be an economic incentive for the creation or redemption to occur to profit off that mismatch. In March, certain bonds were not trading at all. This made that arbitrage trade really difficult to execute. This is why there were discounts in bond ETFs—until the Fed introduced its buying programs.

Were the Fed’s actions during the March period helpful in settling the markets?

Yes. They helped financial markets function again from a liquidity perspective. The Fed used the blueprint from the financial crisis of 2008–9 to quickly come in and address markets that were essentially frozen. Market participants expect certain securities to function normally, such as repos, Treasuries, and inflation-protected securities. The Fed programs brought some liquidity into the fixed-income market, which benefited multiple fixed-income categories. As part of its relief package, the Fed also announced it would purchase corporate debt, including bond ETFs, with the goal of providing additional support to markets.

Which assets classes experienced the largest differences relative to their price and NAV amid the March volatility?

Equity ETFs had the smallest differences between share price and NAV during the volatility in March. While equity returns were down during that period, the market prices for stocks remained transparent, which led to smaller differences relative to their price and NAV. Fixed income, on the other hand, had the biggest differences relative to price and NAV. Some individual bonds didn’t trade for days or weeks. During the height of the March volatility, bond markets were largely frozen, which made it very difficult to determine the fair value of those securities. This meant that bond prices were stale. That’s why investors were seeing ETF prices that were much lower than their NAVs.

How can ETFs help during periods of volatility?

If you consider a functional fixed-income market, the most liquid corporate securities trade approximately a dozen or two dozen times a day. ETFs, on the other hand, trade much more frequently. They trade tens of thousands of times a day. In March 2020, for example, when there was a liquidity issue, ETFs became the only tool of price discovery. For instance, if an ETF were trading at a 5% discount to NAV, that meant the bond prices were stale, and they were actually 5% higher than where the market really thinks they should trade. Based on commentary at the time, there seems to have been a lack of understanding of what discounts and premiums really mean. We think they are a feature of ETFs, not a flaw. Corporate bonds generally don’t trade very frequently. In times of large price dislocations, the market doesn’t know where corporate bonds should be trading. ETF discounts and premiums provide some visibility into where the markets should be.

After the disruptions in March 2020, do you think institutional investors will adopt ETFs more broadly?

We do believe there will be a greater adoption of ETFs by institutional clients over the next few years. We may see larger institutional investors designing their investment strategies with ETFs, based on the liquidity that they provide. Institutional clients generally have a firm understanding of the role ETFs play in fixed-income trading and in providing functional markets. They know ETFs are providing liquidity, an efficient means of risk transfer, and price discovery.

What assets classes do you think ETF investors will flock to in the near future?

One of the Fed’s programs is aimed at shoring up the bond market. They have stated they will buy ETFs tracking the bond market. Retail investors should pay attention to those trades. Gold has been a traditional “safe-haven” asset during times of volatility. For instance, flows into gold ETFs were solid through the first quarter of 2020. Buy-and-hold investors for the most part held onto their passive equity ETFs.

Are there longer-term implications for ETF growth and investor demand after this recent bout of volatility?

We think there is an opportunity on the corporate credit side for ETFs. The credit universe is moving quickly toward the use of ETFs to help with price discovery. There could also be an opportunity with ETFs in mortgage-backed securities and municipals. In addition, there is potential for growth in ETFs that do not provide full transparency in their underlying portfolio on a daily basis. If these structures work, and the arbitrage mechanism functions as intended, there could be more traditional active managers launching active ETFs.

1 “What Happens to the Stock Market After a Recession?” Forbes, April 3, 2020; and “First-Quarter Sell-Off Soon Roils Calm Fixed-Income Market: The global pandemic caused fixed-income market volatility not seen since the global financial crisis,” Morningstar, April 7, 2020.


S&P 500 Index: widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. Investors cannot invest directly in any index.
Price dislocation: a price movement is identified as dislocated if it is four standard deviations away from the mean price change during the past 100 trading days benchmarking period. Spreads: a spread refers to the difference between two prices, rates, or yields Arbitrage trade: arbitrage trading takes advantage of the price differences between stock markets.
Repos (repurchase agreements): a contract in which the vendor of a security agrees to repurchase it from the buyer at an agreed price.
Treasuries: debt securities issued by a government.
Inflation-protected securities: a type of fixed-income investment that guarantees a real rate of return.
Passive equity ETF: a non-actively managed investment vehicle that seeks to replicate the performance of the broad equity market or a segment of it by mirroring the holdings of a designated index.
Mortgage-backed securities: an investment similar to a bond that consists of a bundle of home loans bought from the banks that issued them.
Municipals (bonds): debt securities issued by state and local governments.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, contact your financial advisor or visit Please read the prospectus carefully before investing.

ETF shares are listed on an exchange, and shares are generally purchased and sold in the secondary market at market price. At times, the market price may be at a premium or discount to the ETF’s per share NAV. In addition, ETFs are subject to the risk that an active trading market for an ETF’s shares may not develop or be maintained. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions.

ETFs trade like stocks, are subject to investment risk, including possible loss of principal. The risks of investing in the ETF typically reflect the risks associated with the types of instruments in which the ETF invests. Diversification cannot assure a profit or protect against loss.

Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. High-yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Small and midsized company stocks tend to be more volatile and less liquid than larger company stocks as these companies are less established and have more volatile earnings histories. Investing in foreign-denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

Past performance is no guarantee of future results.

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