Fed’s ETF Buying Shows It’s The “Buyer of First and Last Resort”

During the pandemic sell-offs in March, the Federal Reserve stepped in to shore up the bond markets by purchasing ETFs, but not many versed in the ETF game could predict that the total purchases would reach $8.7 billion by end of August. It substantiates the Fed’s role as a “buyer of first and last resort.”

Per a MarketWatch report, one of the highlights of 2020 has been a “massive inflows into bond exchange-traded funds. In a lower-for-longer world, investors are looking for any edge they can find, and some ETFs may offer a bit more yield.”

“But in addition to that fundamental backdrop, there may be a more straightforward explanation for investor interest in shares of bond funds: the Federal Reserve,” the report added. “In March, amid the coronavirus selloff, the central bank said it would buy ETFs in order to stabilize the financial system – namely, the bond market. Dave Nadig, an ETF industry veteran now at ETF Trends, set out to analyze the Fed’s footprint in the market.”

“The Fed did exactly what it wanted to do here — buying just enough on the open market to convince the Street that they would be the buyer of first and last resort, and bringing investors along for the ride,” Nadig wrote.

Thus far, the report also noted that there have been “flows of $150.1 billion into bond ETFs through August 31 (about $132 billion of that is U.S. funds). As of the end of August, however, the Fed had only bought $8.7 billion worth of such funds.”

Getting in on the ETF Buying Action

The Fed can’t have all the fun and beginning investors who want a piece of the ETF buying action can look to purchasing funds like the SPDR S&P 500 ETF (NYSEArca: SPY). SPY gives investors an all-encompassing fund that looks to mirror the movements of the S&P 500.

Because the fund is so widely traded, it’s liquidity makes it perfect for traders looking to get in and out with the greatest of ease. Conversely, it also suits buy-and-hold investors looking to hold SPY for the long term horizon.

SPY Chart

SPY data by YCharts

Either way, here are some of the key features of the fund:

  • The SPDR® S&P 500® ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”)
  • The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors
  • Launched in January 1993, SPY was the very first ETF listed in the United States

For more market trends, visit ETF Trends.