ETFs In Chaos: Shock Absorbers

November 06, 2018

Here, for example, is how HYG looked in this same volatile window:



Here the story seems even clearer when you look at the flows:



The sustained four days of premia in the ETF here aren’t the result of the “bonds being cheap” so much as they’re the result of the ETF trading furiously enough, for long enough, to establish that the APs could in fact do creations and make money doing so to meet demand. These weren’t big move days for HYG—it moved less than a percent each day. But volumes for all bond ETFs (HYG included) went through the roof in October.

Moral Of The Story

Look, I’m the first one to acknowledge this is anecdotal analysis of three ETFs, not an academic study. I’m also the first to point out that iNAV, ETF fund flows and premium/discount analysis have loads of problems—I’ve written about them all. But we work with the data the market gives us on any given day, and October is a fishbowl in which we can look to see how the ecosystem is working.

And I take comfort that in the dozens of ETFs I’ve checked on in October, everything seems to be working just like it’s supposed to: APs are stepping in, making markets, arbitraging out the price discrepancies, and yes, providing a kind of “liquidity buffer” for big market movements.

Dave Nadig is managing director of He can be reached at [email protected].

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