The economic crisis occurring as a result of the COVID-19 pandemic has brought increased attention to the exchange-traded fund (ETF)1 industry. We have seen extraordinarily high ETF trading volumes on many of the days since the public health emergency emerged, in addition to extreme market volatility. Below is a recap of some of the observations we have while witnessing the ETF ecosystem absorb this high trading volume and volatility.

1) Fixed income ETFs have traded at wide spreads.
When the pandemic became serious in the US in mid-March, we observed market makers become concerned about being able to determine the value of corporate bonds. With a lack of trading, it was difficult to get true traded marks on these securities. As a result, market makers widened their bid and ask prices in order to protect themselves. This translated into investors paying more to buy ETFs and receiving less in return when they sold. As better pricing visibility returned – driven by more liquidity, trading, and federal monetary and fiscal aid – market makers become more confident in pricing and tightened their spreads.

2) Many corporate bond ETFs traded at a discount to their Net Asset Value (NAV)2 and then quickly rotated to trade at a premium.
As the economic implications of the pandemic became clearer in late March, ETF markets saw substantial selling pressure across the board, but especially in the corporate bond space. This selling pressure, combined with limited buying, resulted in an imbalance in many ETFs. Elevated selling activity caused market makers to become wary of taking more ETFs onto their books, so they tried to discourage this by pushing the spread down to the point where a discount existed. This meant that sellers would receive less for selling the ETF than its NAV would indicate.

Typically, when either a discount or premium occurs on an ETF, a market maker steps in to either destroy shares or create new shares in order to bring the ETF price back into balance. If all goes well, these market makers harvest a small profit. With general caution in the markets, limited trading, and concern about taking any balance sheet risk, there were fewer market makers active in providing this arbitrage trading. This left many ETFs trading at a discount.

When the Fed announced it would provide more liquidity into markets by buying both investment grade and high yield bond ETFs, these discounts quickly flipped to premiums. The excitement that this generated brought more buyers into the corporate bond ETF market and again caused an imbalance – this time on the premium side. Once again, market makers were not active in arbitraging the ETFs to bring them back into balance, at least not right away. After a few weeks of these premiums, and a settling of the extreme market volatility, ETF prices returned to their normal range. Market makers again began fulfilling their trading role of seeking small profits by using arbitrage trading, since they had more confidence that markets were more liquid and pricing more visible.

Even though there were larger premiums/discounts during this period of increased volatility, ETFs actually provided much more liquidity than the underlying bonds that they owned. If an investor needed to unload these bonds outside of an ETF, chances are they would not get a bid, since many of these bonds were not trading on any given day. As a result, ETFs allowed investors to gain exposure to these fixed income markets without having to source the bonds themselves.

3) ETFs had wider spreads than usual at the market open.
We saw wider spreads than usual at the open of trading for 3–4 weeks across March and April. This was caused by the lack of pricing clarity previously reviewed, but it reinforces the messaging we communicate to investors all of the time:
  1. We suggest not trading ETFs right when the market opens at 9:30 a.m. ET. Wait for up to an hour after the open, and you may see tighter spreads, which can translate into better value for investors.
  2. In addition to not trading at the open, it may not be advantageous to trade at the close. Spreads are typically not as wide at the close, but they are generally wider than during the bulk of the day.
  3. In order to ensure good execution, we believe it is best to set limit orders for trades, rather than entering trades as market orders. The only exception to this is if the investor wants 100% assurance they will get the trade filled. Using a limit order ensures the full trade (all shares) will get the best price possible. If the investor wants to increase the chances of the order getting filled, but still use a limit order, they can set the limit for buys at the ask and the limit for sells at the bid.
Some of these ETF trading tactics are complex. Investors should work with their financial advisor to ensure they’re properly risk-managed and well-positioned to achieve their portfolio goals. Financial professionals can consult ETF specialists at partner firms with any questions about ETF markets. Volatility is likely to remain elevated as markets and economies continue to contend with the implications of the COVID-19 pandemic. ETFs can offer portfolios enhanced risk-management, liquidity, and diversification during turbulent times.
1 An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold.

2 Net asset value, or NAV, is the value of a mutual fund that is reached by deducting the fund's liabilities from the market value of all of its shares and then dividing by the number of issued shares.


ETF General Risk: Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign Securities Risk: Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. Currency Risk: Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund's investments to decline.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. Visit for a prospectus or a summary prospectus containing this and other information. Read it carefully.