Citing data from XTF Inc., Ari Weinberg reports that pension funds are using fixed income ETFs to adjust to the post-financial crisis realities of bond liquidity. And that is happening at a quickening pace: of the US$335 billion invested in US-listed unleveraged fixed income ETFs, $156 billion has come in over the last five years.
As institutions move into the ETF space, the landscape is changing and some plans are considering the broader fixed income universe through an ETF lens. And some smaller institutions are even using them for long-term core holdings.
The continuing problem, however, remains size and liquidity, factors that just aren’t there for many ETFs in the marketplace. Notes Weinberg, although large ETF holders can use market makers to trade in and out using market makers, there is still a worry that they might not be able to execute in the secondary market.
But the industry is growing and evolving to adjust to the challenges—using ETF options and derivatives. Weinberg also notes that 22% of fixed income ETFs have listed options available and only eight have open interest greater than 10,000 contracts. At the same time, large investors can look at daily share trading volume for a given ETF relative to a creation unit—it’s a good indicator of liquidity and the ability to handle large trades.
It’s an important metric—and one that institutional investors need to look more closely at.
As institutions move into the ETF world, providers are working to create space for them through products that can handle large trades and deliver on that liquidity promise. From the standpoint of investors, however, they need to understand how to properly evaluate ETFs based on how they operate and key variables that will tell them what they need to know