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The Fed’s Buying High-Yield ETFs. Here’s What That Means for the Market.

Over the past few weeks, we’ve been covering the impact of COVID-19-related market turbulence on the Exchange-Trade Fund (ETF) market. Since our previous post, there have been further noteworthy events.

From April 9, the Federal Reserve’s Secondary Market Corporate Credit Facility came into play. Through the facility, the Fed hopes to help stabilize economic conditions by lending to a special purpose vehicle to purchase eligible corporate bond portfolios in the form of investment-grade and high-yield ETFs.

The impact of the Fed’s program was immediate. On the day the facility launched, we noticed major high-yield ETFs closing at a large premium to Net Asset Value (NAV) – particularly HYG and JNK, which closed at a premium of more than 4.5% (a performance that can be attributed to the fact that these two ETFs are highly likely to be included in the Fed’s program).

One of the characteristics of ETFs is that they often react to major news events faster than their underlying bonds. As a result, we can take the premiums as a possible lead indicator of the wider high-yield market.

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For John Lanaro, Global Head of ETFs at RIMES, the events of the past few weeks underscore the need for firms to keep on top of their ETF data: “with prices relative to NAV shifting significantly and at pace, investment firms need to have a solid grasp of their ETFs at the holdings level in order to understand their true risk exposure.

“At RIMES, we provide our clients quality-controlled holdings level data sourced from our large network of ETF issuer partners; giving them the data they need while freeing them to focus on core business activities. We also provide custom reports that alert clients to large gaps between closing price and NAV for the ETFs they’re interested in – something that’s of real value in volatile market conditions.”

To help firms get a handle on ETF data management in these fast-changing times, RIMES will hold a webinar dedicated to key trends within the ETF space, including recent changes to ETF data and the data implications of Rule 6c-11. Contact RIMES for more information.

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