Market access

How investors turned to ETFs for liquidity and market access in 2020

These large inflows were one of the reasons both segments saw record annual inflows in 2020 ($ 59 billion and $ 21 billion, respectively), as investors used ETFs to effectively execute sweeping changes. macro asset allocation. In our view, the Fed itself is turning to ETFs as a means of efficiently and quickly allocating capital in the credit markets across a wide range of issuers (i.e. avoiding the risk associated with a single issuer or the presence of favorable treatment) in a transparent manner underlines this notion.

However, the Fed only accounted for 7% of fixed income inflows during its buying period,[12] illustrating that the central bank didn’t just look to bond ETFs in 2020. More importantly, investors have used bond ETFs for a range of portfolio and trading decisions that are expected to continue as adoption continues. increases, some of which include:

  • Asset transfer: Use of the ETF as a transition vehicle between managers during the reassessment of the global asset allocation
  • Portfolio Coverage: Shorter the ETF to reduce the credit beta of an overall portfolio without having to liquidate the underlying assets
  • Cash shareholding: Maintain market exposure by transferring part of the underlying portfolio to an ETF covering the same sector which can be easily sold on an exchange with a T + 2 settlement to accommodate client redemptions
  • Tactical positioning: Rotation to new exposures based on market dynamics
  • Strategic vehicle changes: Use market dispersion to trade exposure vehicles from mutual funds to the less expensive, more tax-efficient ETF wrapper[13]

The road to liquidity ahead

Diversification, low cost, and transparency are commonly cited as the benefits of ETFs that are expected to drive growth over the next decade. However, the events of 2020 suggest that growth will also be fueled by investors who use ETFs even more as effective tools for liquidity, price discovery and market access.

Ultimately, the additional liquidity benefits ETFs provided in 2020 should boost confidence in the structure and lead more investors to use ETFs more to pursue a wider variety of goals.

Originally posted by State Street, 2/3/21


1 Based on 10-day trading volumes and 10-day average levels of the CBOE VIX Index from January 2010 to December 2019 based on Bloomberg Finance LP, as of December 31, 2020.
2 Bloomberg Finance LP as of December 31, 2020.
3 Bloomberg Finance LP as of December 31, 2020 for trading days in 2020.
4 Bloomberg Finance LP as of December 31, 2020 based on the calculation of State Street Global Advisors SPDR ETFs. The financial crisis had a streak of 118 consecutive days.
5 Bloomberg Finance LP as of December 31, 2020 based on calculations of State Street Global Advisors SPDR ETFs. The gross activity of the primary market is the sum of the gross flows, the absolute value of creations and redemptions, in each fund each day in 2020.
6 Bloomberg Finance LP as of December 31, 2020 based on calculations of State Street Global Advisors SPDR ETFs.
7 Bloomberg Finance LP as of December 31, 2020 based on calculations of State Street Global Advisors SPDR ETFs.
8 Based on the product of the sum of each ETF’s highest level of short interest multiplied by the price of the ETF for each year since 2014, by Bloomberg Finance LP as of December 31, 2020 by calculations by State Street Global Advisors SPDR AND F.
9 Bloomberg Finance LP as of December 31, 2020 based on calculations of State Street Global Advisors SPDR ETFs.
ten Bloomberg Finance LP as of December 31, 2020 based on calculations of State Street Global Advisors SPDR ETFs.
11 Bloomberg Finance LP as of December 31, 2020.
12 State Street Global Advisors SPDR ETF, based on transactions reported by the Federal Reserve, after applying the daily ratio of secondary market activity in the primary market to those transactions to calculate the potential volume that resulted in an entry or exit. exit on a specific day based on the Federal Reserve and Bloomberg Finance LP as of December 31, 2020.
13 Average fees for bond mutual funds are 67 basis points compared to 35 for ETFs. About 40% of bond mutual funds paid capital gains in 2020 compared to less than 20% of bond ETFs in 2020 by Morningstar as of December 31, 2020.


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