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  Fixed-income ETFs pass their
 Performance during
the March sell-off helped dispel fears that the products would deepen a market crash
By Rudy Mezzetta
Fixed-income ETFs dem- onstrated their resilience during the market crash earlier this year, defying
critics who predicted the invest- ment products were a liquidity accident waiting to happen.
Fixed-income ETFs “proved their mettle,” says Joey Mack, head of trading and director of fixed-income and securities lending with RF Securities Clearing LP in Toronto. “You’re going to continue to see more individual investors look to ETFs as their fixed-income solution rather than buying bonds directly.”
Scott Johnston, head of product for the Americas with Vanguard Investments Canada Inc. in Toronto, says ETFs provided the only source of fixed-income liquidity during the market sell-off: “If you held indi- vidual fixed-income [securities] in March and you needed liquidity, you couldn’t get it.”
Detractors had long argued that the mismatch between the liquidity of the ETFs and the underlying bonds could deepen a market crash, putting fixed-income ETF unitholders’ investment returns in jeopardy. However,
while fixed-income ETFs experi- enced a bumpy ride during the height of the market dislocation, they continued to trade. In fact, trading volumes spiked.
If investors had reservations about fixed-income ETFs before
the March crisis, “that fear has kind of gone away,” Mack says.
In early March, as markets absorbed news of the Covid-19 pandemic, selling pressure on bonds increased sharply across the board, including
on U.S. treasuries and investment-grade U.S. corporate bonds. Buyers, it seemed, left the market.
“Asset classes we associate historically with ample liquidity and very efficient price discovery broke down a little bit in that March period,” says Michael Cooke, senior vice president and head of ETFs with Mack- enzie Investments in Toronto.
However, fixed-income ETFs continued to trade, providing liquidity to the market even though the underlying bonds were not changing hands.
There were two reasons for this, Johnston says. First, in the “sec- ondary market,” where up to three-quarters of ETF trading occurs, 8
 Bond ETF trading provided the market with a price-discovery mechanism
  Investment Executive’s ETF Guide 2020

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