ETF Flows: Good afternoon, welcome to the first edition of ETF Trends Live Chat.
ETF Flows: I’m Dave Nadig, Director of Research around these parts. Ask any questions you like, and ill do my best to answer them in the next 30 minutes or so.
ETF Flows: A transcript will be up at the end of the session, in case you miss something, at this same URL>
ETF Flows: Let’s get going!
OldGuy: You used to give a soundtrack for this. Too crazy today? Or …
ETF Flows: God bless ya. Yeah, at times like this I tend to go either super chill or straight-up punk. Today it’s the latter.
ETF Flows: https://open.spotify.com/album/2VW9ZB8kwVYUU0Ok3dpl6Y
ETF Flows: Uranium Club. Good stuff.
Bill Donahue: Dave, what are some of the things that have surprised you the most about the impact of the Coronavirus and related market volatility, including flows, liquidity, etc. related to ETFs?
ETF Flows: Hi Bill, welcome back!
ETF Flows: I’m actually less surprised right now than I was a month ago. The market took a very, very long time to realize this was going to be a major economic event.
ETF Flows: So far, what we’ve seen is about what I’d expect. Everything is “working” for the most part, in that there aren’t any catastrophes. I’m not like, happy, but clearly the systems are all working.
ETF Flows: I have been most surprised by what’s happened in credit and treasuries.
ETF Flows: I never actually thought I’d see a curve this low and flat in my lifetime. It really changes the nature of investing, when the risk-free asset yields nothing.
ETF Flows: So if I was picking one thing to really pay attention to, it would be corporate bonds.
Anon: I saw your piece just now on the trading halts. As a regular old advisor, do I have to worry about participating in auctions and halts and all that???
ETF Flows: Hi Anon, and welcome. Short answer … no, you don’t really need to worry about this. Here’s a link to the article referenced, FWIW:
ETF Flows: https://www.etftrends.com/2020/03/black-mondays-short-duration-blowout…
ETF Flows: My advice really remains the same as always: never play in the first or last 10-15 minutes of the market, and never use market orders.
ETF Flows: The latter is perhaps the most important. THere’s literally nothing else I can think of where a rational person would say “I don’t care what the price is, just get it done.”
ETF Flows: You wouldn’t put your house on the market for the “best offer I get in the next 10 minutes, no matter how low!”
ETF Flows: So why would you put in an order to sell an ETF that way?
ETF Flows: The example of the JPST auction, while interesting, isn’t a systemic problem, it’s a human problem. Some human (or humans) stacked up some indiscriminate sell orders.
Meghan: Hi Dave, can you further explain why you think we should pay attention to corporate bonds?
ETF Flows: Sure. So, this is pretty well known, so hardly deep geek from Dave. A HUGE chunk of corporate issuance int he past decade has been in BBB rated bonds. That’s the step above junk.
ETF Flows: These are the most at risk of default, and obviously the environment is NOT GOOD for companies at the bottom of the credit food chain. I expect a rash of downgrades over the next few months.
ETF Flows: So that BBB paper has to go somewhere, at some price. It will probably be a CHEAP price because far fewer people want junk than want Investment Grade paper.
ETF Flows: First, the fallen angel funds (FALN/ANGL) will pick up a lot of that paper when it gets oversold. But then its just flush in the market. It will have real implications. High-grade paper likely gets bid up, junk bid down.
ETF Flows: there could be some dramatic moments.
Guest: Lots of ETFs had short sale restrictions last couple days, seemed to cause a disconnect to the NAV of the fund at times. What do you think?
ETF Flows: So when a fund (or stock) gets short sale restricted, this shouldn’t have a mechanical impact on whether the fund prices well. Market makers can still sell ETFs they don’t have in inventory in order to make markets. APs can still do their part, selling short and buying the underlying in order to create at the end of the day.
ETF Flows: The disconnect is much more around volatility. The reason securities get restricted or halted is because “they moved a lot.” In those markets, APs often step back and widen out their spreads, because by definition, they have less certainty in their outcomes.
ETF Flows: wider spreads in fast-moving markets means trades off of advertised fair value.
ETF Flows: BUT, in the bond market in particular, you can’t believe NAV/INAV anyway, because those are set by pricing services, not real-world activity, as often as not.
ETF Flows: pricing services are always lagged off real market sentiment.
Todd Rosenbluth – CFRA: Hi Dave. Great to have you do this again. Can you comment about how high yield bond ETFs have held in there despite record volume and outflows? Investors have been getting prices close to NAV and most trading has been in the secondary market.
ETF Flows: And here’s Todd making my point (Hi Todd!).
ETF Flows: For the most part, the junk ETFs have done EXACTLY what they are supposed to do.
ETF Flows: In particular, HYG/JNK have traded at premiums/discounts completely in line with their norm. Yes, HYG swung from a 30-40bps premium to a 30-40bps discount
ETF Flows: But it did that while simultaneously dealing with HUGE, billion-dollar redemption days.
ETF Flows: Any fund that can handle a billion-dollar redemption and only swing to a fractional discount is NOT in trouble. It’s a beast.
ETF Flows: That said, see all the above. It’s the part of the market I’m watching the most closely.
RateHunter: ZROZ: Too late?
ETF Flows: Yes.
ETF Flows: lol
ETF Flows: But seriously: ZROZ is up something like 60% on a one-year basis.
ETF Flows: because a 25 year zero coupon bond is just about the most interest-rate sensitive security known to man.
ETF Flows: It’s very hard for me to build a bull case for owning ZROZ (or any of its ilk) right now.
ETF Flows: I can create a good short case! Eventually, interest rates will normalize, even if that just means a slightly upward slope to the curve.
ETF Flows: and that will swing ZROZ right back down
ETF Flows: Duration is a thing y’all.
Anon: Anything surprising to you in terms of investor reactions in the past week or two as seen through ETF flows?
ETF Flows: I think a lot of people are surprised to see as much INFLOW as we’ve seen. In past market dislocations (particularly say 2000-2001, and the GFC) we didn’t have an ETF for just about any possible thesis.
ETF Flows: Today we do.
ETF Flows: So even if your panicked idea was “Sell all my risk, buy short term bonds” you could do that in a net-zero-flow way, just selling equity ETFs and buying short-duration bond ETFs. Or gold. Or whatever.
ETF Flows: Net-net, this will be a quite positive period for ETF flows, relative to active mutual fund flows. Every market hiccup we’ve ever had, that’s been the case. Some short term chaos, then a FLOOD into low cost beta.
ETF Flows: I see no reason for that to be different this time.
Anonymous: What happens when levered funds become mathematically impossible at times like this?
ETF Flows: Well, we’ve seen a tiny bit of this (we had two funds get delisted last week).
ETF Flows: That was my piece yesterday, FWIW
ETF Flows: https://www.etftrends.com/alternatives-channel/seeing-the-tragedy-of-d…
ETF Flows: But most levered products have triggers under which they simply shut down. So for example, everyone was watching the levered oil funds. They have a 75% drop trigger. If they trade that far down on any day, the simply shut down, and you get whatever money you have left back.
ETF Flows: The more leverage on the more volatile index, the more likely it is to happen.
ETF Flows: It’s for this reason, we don’t have 3X volatility ETPs anymore. They just trigger to quickly at times like this.
ETF Flows: OK, time for one last question before I have to hop.
Anonymous: So, should we be worried about the “plumbing” breaking here? What happens when nobody can go to work to run their funds or trade, or calculate NAVs and such>?
ETF Flows: For the most part, I’m not super worried about this. 20 years ago, sure, this would have been really hard. But 20 years is a long time. Many, many key systems are now easily available remote. Most trading is happening through systems that can be run remotely, etc…
ETF Flows: We’re way past when we had to, had to have guys in blazers on the NYSE floor or the markets simply stopped.
ETF Flows: THere will be some hiccups for sure. In particular, I don’t know a lot of bond desks that have this completely figured out. But technology is pretty awesome, and I feel confident in the core plumbing of the financial system.
ETF Flows: This has been a heck of a test. But so far, it’s actually all passing with flying colors. May not feel like that on a day like today, but, well, there it is.
ETF Flows: OK folks, thanks for joining this inaugural chat. Transcript up shortly on ETFTrends.com. Have a great afternoon! Stay safe out there!
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