“That is the industry convention how we price our ETFs for disciplined conservative valuation practices. But it creates optical illusions versus the underlying cash markets because there are securities in which there haven’t been transactions,” Wiedman said.
The iShares chief did acknowledge the ETF provider needs to do “a lot more work to do in educating clients and other stakeholders about how these vehicles behave, what does the current market price actually represent.”
He also stressed that ETF liquidity depends on the liquidity of the asset class the fund is tracking.
In the bond market, BlackRock CEO Fink said more investors are using ETFs for fixed-income exposure in place of derivatives.
He said the recent bout of illiquidity in the bond market was exacerbated by Wall Street banks facing stricter regulations on balance sheets, leverage and capital.
“We, as long-term investors, are going to have to deal with this. This is why I believe more and more fixed income will be traded on electronic platforms in the coming years and I think we will find a new source of liquidity,” Fink said.
Still, he thinks fixed-income ETFs performed very well during the unsettled markets of May and June.
“There was periods of time during the day where there were appearances of discounts but all that was an indication of where the cash market was going,” Fink said during last week’s quarterly earnings call.
“There is heightened scrutiny of ETFs right now, which I actually believe is a good thing. It’s this type of scrutiny that, in my mind, helps us strengthen the market for the future,” the BlackRock CEO concluded.
“We have a lot of responsibility for the fluidity of this market, for the success of this market. I don’t take that responsibility lightly,” Fink said.
Full disclosure: Tom Lydon’s clients own HYG.