Extremely volatile conditions in the US fixed income market due to the coronavirus pandemic resulted in a very unusual price dislocation in the exchange-traded fund of Vanguard’s $ 55 billion total bond market, the world’s largest ETFs.
The ETF, known by its symbol BND, saw the gap between its closing price and the fund’s net asset value jump at a 6.2% discount on March 12. Most ETFs generally trade throughout the day in a very narrow band around the NAV. of the fund.
Since its launch 13 years ago, BND’s closing premium has averaged 0.17%. Fixed Income ETFs generally trade at a small premium over net asset value, but many opted for a forgiveness this month, fearing that companies may have trouble paying their debts due to disruption caused by coronavirus epidemic.
But Rich Powers, head of ETF product management at Vanguard, the world’s second-largest asset manager after BlackRock, said it was “not unusual” to see this type of divergence in market conditions tense. “ETF market prices can change faster than the net asset value. This is part of the price discovery process. “
The discount for BND had narrowed to 1.5 percent by Monday’s close.
Steve Zamsky, an executive at Smith Capital and former director of US credit trading at Morgan Stanley, said: “The ETF vehicles have held up well until about 10 days ago, but the spreads have started to widen. dig and they persist since. It shows the challenges that exist. Liquidity has been really, really tough, and afterwards there is a lot of pressure on ETF lands.
BlackRock operates a direct competition ETF called AGG. The rebate for AGG widened to 4.43% on March 12 and has since shrunk to 1.44%.
“Market makers must be extremely careful in assuming and assessing risk under these difficult conditions. No one really has a clear idea of the price of some of the bonds held by these ETFs, “said Ben Johnson, director of passive fund research at Morningstar, the data provider.
Vanguard is one of the largest bond managers in the world and takes pride in the efficiency of its fixed income transactions. The Pennsylvania-based group relies on an independent third-party provider to calculate the net asset value of its fixed-income ETFs using completed bond transactions.
The ETF’s closing price is based on quotes from a wide range of market makers. It also reflects an assessment of the liquidity of the bonds held in the ETF by market makers.
“Market makers of ETFs face uncertainty about the fair value of bonds and how long they may have to hold them while they wait for investors to trade. Market makers assess liquidity, and liquidity comes at a cost, ”said Mr. Powers.
He said the Vanguard line of fixed income ETFs had traded at discounts ranging from 1% to 4% in the past two weeks.
Nearly $ 500 million was withdrawn from BND on March 12. BND is structured as a share class in the $ 269 billion total bond fund Vanguard, the largest of its kind in the world. Investors who withdrew from other share classes of the mutual fund were able to do so at the closing NAV.
Vanguard received calls from a number of customers who made transactions that day, but did not make any specific communication regarding the ETF by email or on its website.
“Vanguard Fixed Income ETFs continued to trade as expected during this volatile period, providing valuable price information and liquidity to investors who need it,” said Mr. Powers.