Pricing and Liquidity of Fixed Income ETFs in the Covid-19 Virus Crisis of 2020

Abstract

We show that during the 2020 Covid-19 crisis: (a) Bond ETFs acted as vehicles of price discovery, and with prices often close to their intrinsic values, despite deviations from net asset value (NAV) that at times were large; (b) Bond ETFs allowed investors to rapidly and efficiently manage exposure and risk at low costs; and (c) Contrary to some academic theories, there is no evidence of “wrong way” arbitrage.

TOPICS: Exchange-traded funds and applications, exchanges/markets/clearinghouses, volatility measures

Key Findings

• • During the 2020 Covid-19 crisis, bond ETFs acted as vehicles of price discovery, and with prices often close to their intrinsic values, despite deviations from net asset value (NAV) that at times were large.

• • Bond ETFs allowed investors to trade in the secondary market, and to rapidly and efficiently manage exposure and risk at low costs.

• • The primary market where ETF shares are created and redeemed also functioned smoothly, with no evidence that the arbitrage activities of authorized participants were destabilizing.