ETF Edge: CIO Dave Nadig Talks The Fed's Corporate Bond Activity

So, the Fed is buying bonds ETFs? While we may be at home, the news doesn’t stop as ETF Edge returns with CNBC’s Bob Pisani speaking remotely with ETF Trends’ CIO and Director of Research, Dave Nadig, along with CFRA’s Director of ETF and Mutual Fund Research, Todd Rosenbluth. The group tackles a huge day for the ETF industry regarding the Fed.

Starting with a big announcement explained by Nadig previously, the Federal Reserve is not only buying treasuries and mortgage-backed securities, but also corporate bond ETFs. As Nadig states, this is a good thing, as it puts buying pressure under what has been the most pressured part of the market – bonds.

“Seeing the Fed make this move is unprecedented, but not necessarily unexpected,” Nadig adds.

There have been examples of central banks doing things like this. It’s been generally focused on equities, but there could be a similar way to take things for the U.S. Nadig’s hope is that they participate broadly in the market, not just in ETFs, but across the bond spectrum.

Pisani then questions whether the Fed should be paying attention to the price of the bonds underneath it. Basically, how is this all working?

Rosenbluth jumps in here to explain how ETFs has a price that it trades intraday, and then there’s a net asset value, which is the value of the bonds inside. So, the Fed appears to be offering a bid for the bonds that will be inside the ETF. Putting too much pressure on the price would lead to a premium. This would be a counter to the discounts that have been offered in recent weeks.

How Does This Change The ETF Community

In terms of how this changes the ETF community, Nadig notes how the U.S. is hitting on new territory. That said, on the short terms, it’s clear – buying pressure will bring up the price of the ETFs, and ideally mark the price of some of the un-trading bonds if they start being the buyer of last resort, where they’ll still be at reasonably low prices.

That in mind, the initial facility that has been put in place to make these ETF purchases does have limits. So, it’s not as though they can own the whole bond market. They’re limiting themselves to a fairly small percent, meaning they won’t become a dominant player, which is essential.

Putting that in perspective, with the buybacks on the equity side, that’s going to allow taxpayers to have shares of these giant corporations. It may not lead to a long-term buy and hold a position, though, compared to a shorter term.

Rosenbluth adds some thoughts, noting how because of a limit, the Fed doesn’t want to own more than 20%, there’s a handful of these corporate bond ETFs, including LQD, along with some Vanguard products such as VCIT, mean these billion-dollar companies won’t meet the threshold. The Fed doesn’t want to own too much of it, let alone feel it’s worth their time.

Rosenbluth continues, “This is likely to be a short-term phenomenon, but it will help all the other corporate bond ETFs, if they’re buying the underlying bonds of AT&T, Coca-Cola, J.P. Morgan, etc. That helps the securities inside the portfolio, which will help to bring the net asset value back to more of a stabilized level for the foreseeable future.”

To be clear, this applies only to corporate bond purchases. There’s no talk of the Fed buying equities or equity ETFs. As Nadig states, this is true, but “all bets are off.” There may be a line in the sand currently, but it’s important to understand this isn’t the Fed going in to buoy the entire market.

They’re explicitly not going to buy up ETFs that come at a premium. If they manage to re-establish equilibrium at the market, that could stop the purchasing, and the market could go back to setting prices. Ideally, this would be an open market activity in the corporate bonds themselves. Nadig supposes they could just be talking ETFs to give comfort to those in the highly liquid ETF market.

Watch Dave Nadig Discuss The Fed’s Bond Purchases And More:

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