Fixed-Income ETFs Research Articles

Index Tracking Error Optimization of Equity and Fixed-Income ETFs

Index Tracking Error Optimization of Equity and Fixed-Income ETFs

Authorised participants as shock absorbers in fixed-income ETFs

This paper uses unique regulatory propriety data to analyse ETF secondary markets from a financial stability perspective. We find that ETF secondary markets are somewhat concentrated, but that a subset of Authorised Participants are active in both primary and secondary markets and act as a buffer between these. Only around a third of the net selling pressure in the secondary market manifests in redemptions in the primary market and this result holds across observed periods of mild market stress. However, the high yield fixed income segment may be more fragile during periods of stress.

Fixed income ETFs: Primary market participation and resilience of liquidity during periods of stress

Using a unique transactions dataset, we present initial facts about participation in ETF primary markets and an analysis of the behaviour of liquidity providers in times of stress. We find that ETF primary markets are highly concentrated, particularly for fixed income. However, our preliminary analysis of stress events provides some evidence that alternative liquidity providers ‘step up’ during times of market disruption.

Analysis of ETF bid-ask spread components

Abstract In this study we examine on intradaily basis (milliseconds) the largest 100 ETFs’ bid-ask spread components in the period March 21, 2014 to April 17, 2014. We document that ETFs have lower proportion of adverse selection in the bid-ask spread relative to stocks, which also means that the order processing cost component is higher in ETFs. This suggests that uninformed investors prefer to trade ETFs relative to individual stocks. The data in our study also suggests a U-shaped form of the adverse selection component across four categories of ETF trading volume and not a monotone decreasing relation from lowest to highest trading volume ETFs. Fixed-income ETFs have the highest adverse selection component coefficient whereas real estate ETFs have the lowest. Additionally, mutual fund structured ETFs have lower adverse selection component coefficient than the trust structured ETFs. We also document that ETFs with more quotes have lower adverse selection; whereas ETFs with higher average bid price, higher expense ratio and trust structuring of the ETF have higher adverse selection component of the bid-ask spread.

Active Exchange-Traded Funds: Are We There Yet?

Investors anxiously anticipated the debut of actively managed ETFs in 2008, expecting them to succeed as well as their counterparts in the mutual fund industry. In the end, the reality didn’t match the expectations, as actively managed funds are still languishing in the basement of the ETF industry. The first goal of this study is to identify the factors responsible for this state of affairs, particularly an issue around transparency that remains the focus of contention between the Securities and Exchange Commission and fund sponsors pursuing approval of new active ETFs. This study will also investigate whether this sector, which seven years into its existence still presents the characteristics of a cottage industry, is capable of turning the tide and turning into a compelling investment premise. For this purpose, a series of statistical metrics commonly used in the market were applied to all of the current active ETFs, which are split in this chapter into broad asset categories for the sake of convenience. The results show fixed-income ETFs as the only type capable of bringing some value to an overall investment portfolio by enhancing its returns while at the same time reducing its variability. No wonder that they represent by far the largest share of the U.S. active ETF market, although it remains trivial as a whole in terms of net assets.

The performance of German fixed-income etfs in the presence of the debt crisis

espanolLos bonos del Estado aleman atraen inversores en renta fija como si fueran un cielo seguro en el que se busca refugio de la degradada deuda publica de otros paises de la eurozona. Se aprovecha esta tendencia para diagnosticar el rendimiento de los fondos cotizados de renta fija alemana en linea con las oportunidades de inversion de los inversores en bonos. A partir de una muestra de 38 fondos cotizados de bonos alemanes durante el periodo comprendido entre su constitucion y diciembre de 2010, se encuentra que: 1) los mencionados fondos no proporcionan un rendimiento superior al del mercado, lo que persiste en una base trimestral; estan asociados con alfas negativos, 3) tamano pequeno y efecto momentum, y 4) un tracking error, estadisticamente significativo, del 0,06%, persistente en una base trimestral. En general, los resultados que se obtienen constituyen la primera evidencia empirica sobre el comportamiento de los fondos cotizados de bonos alemanes en relacion a los benchmarks o referencias, obteniendose que los inversores en renta fija que negocian con ellos deberian utilizar estrategias de asignacion para beneficiarse los efectos tamano y momentum encontrados en esta investigacion. EnglishThe German government bonds attract fixed income investors as a safe heaven seeking refuge from the downgraded debt of other Eurozone countries. We exploit this tendency to diagnose the performance behavior of German fixed income Exchange Traded Funds (hereafter ETFs) in line to investment opportunities facing bond investors. In a sample of 38 German bond ETFs during the period from their inception to the end of 2010, we find: 1) ETFs fail to deliver any positive excess return with respect to the market return and this persist on a quarterly basis, 2) ETFs are associated with negative alphas, 3) a small size and a momentum effect on bond ETF returns, and 4) a statistically significant tracking error of 0.06% which is persistent on a quarterly basis. Overall, our results provide the first empirical evidence on how German bond ETFs behave with respect to the benchmarks and imply that fixed income investors using German bond ETFs should apply allocation strategies to benefit from the size and momentum effects found

An Analysis of the Growth in the Fixed Income ETF Market

Since the financial crisis, demand for fixed income ETFs has increased dramatically. An analysis of this market shows that most of the growth has occurred in ETFs covering U.S. Corporate Bonds, Global Bonds and Emerging Market Bonds. This rapid growth suggests that institutional investors have begun to use fixed income ETFs to achieve both strategic and tactical asset allocation goals. Changes in fixed income ETF volume are positively related to changes in the VIX, which suggests that investors are using fixed income ETFs to tactically shift into fixed income when the stock market becomes more volatile.

Adding Exchange-Traded Funds to the Institutional Portfolio Mix

This article addresses the following key points: ETFs can fit into active strategies as well as passive ones. ETFs allow targeted exposures to sectors and markets. ETFs can provide an alternative to futures as a transition tool. Fixed-income ETFs offer more transparent pricing information than typical bond trades.