Join our community of smart investors

How ETFs navigate choppy bond markets

Investors are concerned about the ability of exchange traded funds to deal with illiquid bond markets, but these products may be better placed to handle them than open-ended funds.
How ETFs navigate choppy bond markets

Advisers and market experts have grown increasingly concerned about the ability of large bond funds to meet redemptions in recent months, and now concerns have been growing about exchange traded funds (ETFs) which invest in bonds. While private investors can only buy and sell shares from a broker, larger institutions can redeem holdings directly, as with an open-ended fund such as a unit trust or an open-ended investment company. But last month in the US, during market turbulence, Citigroup, which acts as what is known as an authorised participant, a broker for institutions, briefly suspended redemptions on some ETFs.

Read more on concerns over actively managed bond funds

However, some argue that this should not be a great concern for private investors trading small numbers of shares via brokers as Citigroup allowed this type of activity to continue. And, as Citigroup is only one authorised participant acting on these products, institutional investors could have bought and sold the ETFs via other authorised participants. For this reason, providers such as iShares argue that ETFs pretty much do what they say, and if retail investors want to get out, they can.

"I do not think that this is any reason to buy actively managed funds in preference," says Adam Laird, passive investment manager at Hargreaves Lansdown. "When ETFs work well, they can actually be more liquid than the investments they follow - they often have an advantage over actively managed products. Whenever there are liquidity problems, it often hits all products across the board and there are examples in other asset classes where actively managed funds have been affected worse by liquidity issues than ETFs. If you want a passive exposure to bonds, ETFs are still an efficient way to get it."

To continue reading...
  • Read 3 articles for free each month
  • Educational articles and topical investment guides
  • In-depth podcast episodes by our writers and industry professionals
  • Interactive live webinars on investment themes that matter
Have an account? Sign in