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A look inside the Fed's $1.307 billion ETF allocation – 7 iShares ETFs account for 48% of the assets

The Federal Reserve announced on March 23rd that it would purchase corporate bonds for the first time in its 107-year history. The Federal Reserve Bank of New York announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin purchases of exchange traded funds (ETFs) on May 12th.

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The Fed is not the first central bank to purchase ETFs as part of a stimulus package. The Bank of Japan has been purchasing equity ETFs listed in Japan since 2012 as part of its QE program. The Bank of Japan reported holding $289 billion or approx. 76% of the $382 billion investment in the ETF industry in Japan (source: ETFGI Japanese ETFs and ETPs industry insights April 2020 report). This will be the first time in the Fed’s 107-year history that it will purchase ETFs.

BlackRock, the world’s largest asset manager and largest ETF issuer, will be running the Fed’s three debt-buying programs. BlackRock said it would waive investment advisory fees on the iShares ETFs it buys on behalf of the Fed.

The Fed reported that between May 12th and May 19th it purchased $1.58 billion in Investment Grade and High Yield ETFs with a current market value of $1.307 billion. The purchases have been in 15 fixed income ETFs of which 6 are High Yield and 11 are Investment Grade. The majority – 83% - of the investment has gone into Investment Grade ETFs with the remaining 17% allocated to High Yield ETFs.

The ETFs/ETPs industry in the United Sates had 2,315 ETFs/ETPs, assets of $4.046 trillion, from 158 providers at the end of April 2020. iShares is the largest ETFs/ETPs provider in terms of assets with $1.542 trillion, reflecting 38.1% market share; Vanguard is second with $1.074 billion and 26.5% market share, followed by SPDR ETFs with $66.06 billion and 16.5% market share. The top three ETF/ETP providers, out of 158, account for 81.1% of global ETF/ETP AUM, while the remaining 155 providers each have less than 6% market share (source ETFGI United States ETFs and ETPs industry insights April 2020 report).

In the US at the end of April there were 1,292 products that provide exposure to equity indices with $2.970 trillion or 73.4% of overall assets, 284 products provide exposure to fixed income indices with $806 billion or 19.9% of the assets and 84 products provide exposure to commodity indices with 2.5% of the assets (active, leverage, inverse and other products account for the remaining assets). There 76 investment grade corporate bond products with assets of $158.92 billion and 36 high yield corporate bond products with assets of $47.06 billion.

The ETFs the Fed has purchased are managed by 5 ETF managers. There are 7 iShares ETFs on the list which represent 48% or nearly half of the $1.307 billion overall investment. Vanguard has 2 ETFs on the list which account for 35% of the assets, there are 3 SPDR ETFs (SSgA) with 15%, while VanEck and Xtrackers (DWS) each have one ETF with 1% of the overall allocation.

Chart 1 The 15 ETFs that the Fed has purchased through May 19th

The “SMCCF” may purchase U.S. listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds. The SMCCF will consider several additional factors in determining which ETFs will be eligible for purchase. Those considerations include: the composition of investment-grade and non-investment-grade rated debt, the management style, the amount of debt held in depository institutions, the average tenor of underlying debt, the total assets under management, the average daily trading volume, and leverage, if any.

The SMCCF is transacting with Primary Dealers that meet the Eligible Seller criteria and that have completed the Seller Certification Materials. As of May 19th the Fed has purchased ETFs from 10 primary dealers see chart 2 below. Additional counterparties will be included as Eligible Sellers under the SMCCF, subject to adequate due diligence and compliance work.

Chart 2 The 10 Primary Dealers the Fed has purchased ETFs from through May 19th

Deborah Fuhr 3 June

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P.S.

Includes the market value of securities purchase transactions in the amount of $1,307,027,514.20, which is the recorded value of all transactions that have reached their contractual settlement date as of May 19, 2020. For purposes of this report, total securities trades have been reduced by the total purchase amount of trades that have not reached their contractual settlement date ($286,910,807.53).

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