Back

Liquidity and other credit market ETF traits

Credit Market - Liquidity and other credit market ETF traits

Research & Investment Strategy

Key points

  • The rise of exchange traded funds (ETFs) has been a key component in the overall growth of passive investments. However passive funds still represent only a fraction of total global assets under management.
  • A key concern for investors is the potential of ETF liquidity mismatch to destabilise the markets that underlie them. But we are yet to witness such a significant systemic event and therefore have no yardstick to gauge the potential impact of such a situation.
  • Mainstream indicators show a steady trend of improving ETF liquidity. Yet, equity ETFs have experienced liquidity air pockets during flash crash episodes in equity exchanges, albeit with limited slipover effects on credit ETFs.
  • Notwithstanding the small size of ETFs relative to their market, academic literature suggests that ETF inclusion affects the price of bonds positively. The liquidity of these bonds is also affected and at times, perhaps counterintuitively, negatively so.
  • The short volatility ETF carnage in February has brought attention to inverse, levered and synthetic ETFs. While they remain only a fraction of the ETF universe, they can exacerbate liquidity dynamics in vanilla ETFs – a topic of ongoing research.

ETFs market size

The exchange traded fund (ETF) market has enjoyed spectacular growth ever since the first vehicle launched in 1993. One key factor behind the popularity of ETFs is they give access to all investor types – from retail to institutional – to wide range of asset classes including, among others, corporate bonds, commodities, real estate and emerging markets - assets that can be less liquid and perhaps more opaque than more traditional investments. In this respect, ETFs can help investors further diversify their portfolios, via a liquid and low cost instrument. Some studies (BIS 2018[1]) argue that their popularity has been supported by structural shifts in the financial advisory space, such as the rise of the so-called robo-advisers, which often include ETFs in their low-fee automated investment management services. The sector has expanded even further in recent years with the introduction of active management style ETFs.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

© AXA Investment Managers 2018. All rights reserved