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Magazine Issues » October 2020

ETF roundtable: Passing the pandemic litmus test

The Covid-19 crisis tested their resilience – but while exchange-traded funds have fared well, many find them hard to grasp. Our panel discusses ways to understand them, how widely they’ve been adopted and their potential role in ESG investing. Chaired by Alex Rolandi.


Jose Garcia-Zarate (associate director of passive strategies research, Morningstar)
Ankit Shah (head of investments and treasury, QIC Global)
Caroline Baron (head of ETF sales – EMEA, Franklin Templeton)
Matthieu Guignard (global head of product development and capital markets, Amundi)
Jason Guthrie (head of capital markets, Europe, WisdomTree)
Rumi Mahmood (head of fund research, Nutmeg)

Funds Europe – There have been huge flows into bond ETFs in recent times owing to policy measures aimed at economic stability. Even though bond ETFs have been in development for some time, has the market been able to meet demand?

Jose Garcia-Zarate, Morningstar – Critics of ETFs have always been waiting for a time of financial crisis to see the ETF vehicle crumble. The period of significant volatility in the early stages of the pandemic was like a litmus test, particularly for bond ETFs, and it’s shown that the vehicle is resilient, but it’s also shown their advantages.

As far as I am aware, no single bond ETF has actually closed for redemptions. A lot of people have now realised the positive aspects of the structure of ETFs. In particular, bond ETFs as instruments for price discovery and the value of the secondary market of ETF shares has come into play more prominently. More people understand how essential it is for creating this additional layer of liquidity for bond markets, but there are still misconceptions.

Rumi Mahmood, Nutmeg – Bond ETFs have been in the news a lot recently. Yet, they have existed for the best part of decade – they’ve been through multiple different market environments, perhaps not a drawdown or liquidity challenge of the degree faced this year, but bond ETFs aren’t new. What’s interesting is policymakers’ response to how ETFs have behaved during the Covid-19 crisis. For far too long, we have incorrectly heard that ETFs are a barrier to liquidity, and that bond ETFs are structured in a way that causes market infrastructure problems. To the contrary, in fact, ETFs have helped enormously during these turbulent times, and the power of ETFs has been acknowledged by organisations such as the BoE [Bank of England], BIS [Bank for International Settlements] referring to ETFs as “release valves”.

Research and post-analysis have shown that enormous volumes of bond ETFs successfully exchanged hands in March, with these exchanges enabling investors to buy and sell ETF shares – without trading the underlying bonds. This shows that the market was able to meet demand.

As we find ourselves coming closer to the other side of this crisis, bond ETFs have essentially been credited with having helped the market function. For the first time, the Fed has purchased bond ETFs, because they recognise that ETFs play a critical part in liquidity.

Regulators and organisations, such as the Bank of England, are now recognising how ETFs play a significant role in the liquidity structure of the market.

Jason Guthrie, WisdomTree – ETFs have broadened the investor base: they’ve democratised access to what was a structurally difficult market to access, and I don’t think anyone is going to make the argument that capacity or stability is hurt by having a wider investor base by making it a more investable market segment. There are more people looking to buy or looking to sell. Yes, if everyone’s trying to run for the exit at the same time, then that’s when we’re going to have a sharp decline or a sell-off or a liquidity crisis, but none of that is to do with the wrapper.

Caroline Baron, Franklin Templeton – The weight of fixed income ETFs is still low in comparison to the overall ETF market, at around 30%. This segment is still in the development mode from the product point of view. Investors are quite familiar with the cap-weighted indices, but now we see more activity on the smart beta front. For example, more active ETFs are being developed, especially on the fixed income side. There’s a lot happening in terms of creativity from a product point of view, so we believe this is just the beginning for fixed income ETFs.

ETFs also brought this layer of transparency that was not there when it comes to fixed income.

Matthieu Guignard, Amundi – Before the crisis, one of the questions from regulators and clients was, ‘Are ETFs a problem or a threat to the market?’ Following the pandemic’s crash test, ETFs are now more than ever considered as an efficient solution to some of the problems of the market. They have been able to reflect the true level and cost of liquidity in the crisis. It’s a sign of the importance that ETFs now represent in the market, the status that they have reached, being used now not only by long-only holders but also by banks as a hedge on their balance sheet. We have more and more actors using ETFs and replacing other instruments such as credit default swaps with ETFs.

Ankit Shah, QIC Global – The development of fixed income ETFs has allowed investors to tap into those niche areas of FI [fixed income] where not everyone is comfortable going as direct allocation. The ETF industry has managed to keep up with the demand of the diversification coming from the investors.

The only challenge that we’ve certainly seen was the liquidity issue. We felt that liquidity fell short when it came down to the peak of the market volatilities, even though ETFs are considered a fully liquid allocation or investment tool. But in terms of demand versus supply, there are very many good options available for investors to choose from.