“In the face of sharply falling prices, sellers of high-yield bond ETFs found willing buyers in the secondary market,” Stevens said. “Again, there was no flood of redemption requests. This secondary market trading of ETF shares relieved pressure on trading in the high-yield bond market by providing an alternative mechanism for investors to adjust their exposure to high-yield debt, enabling investors to efficiently transfer risk among themselves.”
Critics will also single out August 24, 2015 or the so-called mini flash crash as sticking point over ETF and liquidity. While some equity ETFs experienced heavy declines that diverged from their underlying net asset values, the anomaly was attributed to structural flaws in the exchange, notably those associated with the ETF arbitrage system, which have been addressed by the Securities and Exchange Commission.
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“Often ignored is that these ETFs did not experience significant redemptions, and their prices were back to equilibrium within an hour of the opening bell,” Stevens said.
More telling was the fact that bond ETFs, which many believed showed a false sense of liquidity, encountered no difficulties on August 24.
“ICI research shows that bond ETFs were resilient, and that there was no apparent spillover from equity to bond ETFs that would indicate a general problem with the ETF structure,” Stevens added.
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