Fixed Income ETF Liquidity questioned in Bloomberg Article

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motorcyclesarecool
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Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by motorcyclesarecool » Fri Jul 12, 2019 6:44 am

https://finance.yahoo.com/news/panic-sa ... 23104.html
I see a few old threads on the topic of ETF liquidity but nothing recent. In my mind, the dilemma this poses isn’t bond Mutual Fund vs. ETF, but individual bonds vs bond funds. If a bond ETF were to fail, what advantage would that be over holding a basket of underlying assets individually?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

schooner
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by schooner » Fri Jul 12, 2019 6:56 am

motorcyclesarecool wrote:
Fri Jul 12, 2019 6:44 am
https://finance.yahoo.com/news/panic-sa ... 23104.html
I see a few old threads on the topic of ETF liquidity but nothing recent. In my mind, the dilemma this poses isn’t bond Mutual Fund vs. ETF, but individual bonds vs bond funds. If a bond ETF were to fail, what advantage would that be over holding a basket of underlying assets individually?
The problem is the false sense of liquidity. Theoretically, there would be little difference, but how many ETF investors would actually buy those illiquid assets individually?

It’s still a head scratcher to me why most (vocal) Bogleheads have jumped into the deep end with ETFs when Bogle himself was so reticent...but that conversation was shut down quickly

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vineviz
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by vineviz » Fri Jul 12, 2019 7:14 am

motorcyclesarecool wrote:
Fri Jul 12, 2019 6:44 am
https://finance.yahoo.com/news/panic-sa ... 23104.html
I see a few old threads on the topic of ETF liquidity but nothing recent. In my mind, the dilemma this poses isn’t bond Mutual Fund vs. ETF, but individual bonds vs bond funds. If a bond ETF were to fail, what advantage would that be over holding a basket of underlying assets individually?
How do you imagine a bond ETF would “fail”?

It’s never happened before, so we’d need to know more about what exactly you’re imagining to give a coherent answer.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

schooner
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by schooner » Fri Jul 12, 2019 8:26 am

vineviz wrote:
Fri Jul 12, 2019 7:14 am
motorcyclesarecool wrote:
Fri Jul 12, 2019 6:44 am
https://finance.yahoo.com/news/panic-sa ... 23104.html
I see a few old threads on the topic of ETF liquidity but nothing recent. In my mind, the dilemma this poses isn’t bond Mutual Fund vs. ETF, but individual bonds vs bond funds. If a bond ETF were to fail, what advantage would that be over holding a basket of underlying assets individually?
How do you imagine a bond ETF would “fail”?

It’s never happened before, so we’d need to know more about what exactly you’re imagining to give a coherent answer.
Party like it’s 2005 ;-)

not4me
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by not4me » Fri Jul 12, 2019 12:36 pm

motorcyclesarecool wrote:
Fri Jul 12, 2019 6:44 am
https://finance.yahoo.com/news/panic-sa ... 23104.html
I see a few old threads on the topic of ETF liquidity but nothing recent. In my mind, the dilemma this poses isn’t bond Mutual Fund vs. ETF, but individual bonds vs bond funds. If a bond ETF were to fail, what advantage would that be over holding a basket of underlying assets individually?
Not clear on how you are defining the ‘dilemma’ & the article was too long for me to read it all. So, this may be off base, but at least a different perspective. I think you are comparing 2 investors: 1) buys an etf that holds 100 “bonds” (just as an example); 2) buys 100 bonds in same % as found in the ETF. It does seem to me that in the long run, these 2 would have similar results. But, I don’t think that is the concern usually under consideration.

Consider adding a 3rd investor; one who buys an open-end mutual fund that contains the ETF. Something occurs – for example, a headline that triggers major concern -- & suddenly there is a desire to get out of the area those 100 bonds happen to be in. (By area I mean, high yield, municipals, etc as example that might be more illiquid than others) Owners of the ETF decide to get out & are willing to take a significant discount to NAV to do so. Depending upon the size of the “panic”, there is a ripple effect. Some owners of the mutual fund may issue redemption orders…among the scenarios that might cause the fund to sell off the ETF even when it didn’t want to & even at a heavy discount to nav. So, even if investor 3 doesn't sell, they lose a bit.

In most cases, after some period of time, the ship would right itself. The value of the underlying assets wasn’t affected – the headline wasn’t true, etc. The ETF would return to trading at NAV & for the investor who held on during the downdraft, things move ahead. But sometimes you have to sell…paying for college, taking a RMD near the end of year, closing on a house, etc. & you can’t wait it out.

robertmcd
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by robertmcd » Fri Jul 12, 2019 1:01 pm

This mainly pertains to junk bonds and their corresponding high yield etf's. People are using them as trading vehicles for credit spreads essentially, and they are very liquid. But the underlying securities require extensive analysis and are illiquid.

Pigeye Brewster
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by Pigeye Brewster » Fri Jul 12, 2019 2:26 pm

The article states that some institutions are using bond ETFs as cash substitutes, with a Greenwich Associates survey indicating about half of institutions that own bond ETFs are using them for cash management. An example given is an Eaton Vance short-duration strategic income fund that is using a loan ETF to minimize cash drag.

Such a strategy works fine until it doesn't. Auction rate preferred stock was once used in a similar fashion until the market imploded in 2008 and auctions failed. All of a sudden, a liquid investment vehicle wasn't liquid, and the cash substitute wasn't cash-like any more.

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jeffyscott
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by jeffyscott » Fri Jul 12, 2019 3:15 pm

It may be partly self-serving, since they are not in the ETF game, but I think the T. Rowe person makes a good point:
“We’ve taken a bunch of semi-liquid securities, put that into an equity wrapper, said now you’re an equity and now you’re liquid,’’ said Deshpande, currently head of fixed income quantitative investments and research at T. Rowe Price Group Inc. “It doesn’t always work that way.’’

Aside from, perhaps, nominal treasuries bonds are not as liquid as stocks, nor is the market as efficient as that for stocks. It was one thing to put them in a wrapper, called a mutual fund, that one can trade only daily at the close, with the mutual fund company essentially being required (or call it obligated) to provide this daily liquidity, it is quite another to put them in a wrapper that can be traded all day long with no one really obligated to provide liquidity.
Time is your friend; impulse is your enemy. - John C. Bogle

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motorcyclesarecool
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by motorcyclesarecool » Sun Jul 14, 2019 5:52 am

I guess I’m defining failure as, in panic selling, the ETF dives far under NAV and circuit breakers repeatedly kick in.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

alex_686
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Re: Fixed Income ETF Liquidity questioned in Bloomberg Article

Post by alex_686 » Sun Jul 14, 2019 6:17 am

motorcyclesarecool wrote:
Sun Jul 14, 2019 5:52 am
I guess I’m defining failure as, in panic selling, the ETF dives far under NAV and circuit breakers repeatedly kick in.
I would not. If you are referring to 2008, which do you think generates a more accurate price of illiquid assets? The market price of a ETF or an accountants estimate of the NAV. As somebody who was sitting next to those accountants I think it eas the ETFs, and that the is the general industry consensus.

I will also point out that you are probably harmed, not helped, by that inflated NAV.

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