Vanguard: Last week’s ETF market developments and why to consider active strategies as well…
Andreas Zingg, Head of Switzerland and Liechtenstein
“Overall across markets, we have seen last week, that money continued to flow into commodity and money market ETFs but fixed income ETFs also saw sizeable inflows after three consecutive weeks of outflows.
In equities, investors keep withdrawing assets out of US and EM equities, yet at much lower levels than observed in previous weeks for US equities. In fixed income, investors remained buyers of corporate bonds across EUR-, USD- and GBP-denominated issuances.
Overall, March has eventually seen leaving European-domiciled ETFS, bringing year-to-date flows into European-domiciled ETFs to a net outflow.”
“Our UCITS ETF lineup saw primary market net inflows during the month of March. During the month, we saw spreads across the industry widen, as market makers adjust their quotes to compensate for higher trading costs and uncertainty. The week commencing 23 March saw some of the most extreme market moves for ETFs, with spreads widening to over 4 times what they were in February.
This mirrored broader market volatility. Spreads have tightened from these highs, however the levels still remain wider than in normal market conditions. Secondary market trading volumes also increased in March, and there was a notable increase in the use of over the counter (OTC) and request for quote (RFQ) trading venues as investors favoured speed of execution.
Compared to February, Vanguard’s UCITS secondary market volumes were up 59% this month. During the first few weeks of March, fixed income ETF discounts across the industry were larger than usual. Following the Federal Reserve’s (FED) announcement that they will be buying corporate bonds and fixed income ETFs with corporate bond exposure as part of their stimulus package, we have started to see some of these discounts normalize and quote at premiums to NAV.”
“Now could be a good time to also consider actively managed products. Because of this liquidity discount, you can get the same exposure in a much more valuable way if you know where the pockets of liquidity are and are not.
For instance, in the Treasury market, there are bonds that look substantially similar. They’re on the same point of the curve. They’re government-backed and can be at very different prices and yields in an environment like this, and being able to monetise that liquidity discount is a great active strategy.
In credit markets, selection is critical in a market like this. For both active and index, that it’s a really critical time to understand what’s in your portfolio. So it’s a good time to take a hard look at that through a reading of fund materials.”