Fed Buys 16 Bond ETFs

June 30, 2020

The Federal Reserve has just published the list of ETFs it purchased over the past month, and surprisingly, the agency's purchases accounted for half or more of all net flows into several of those fixed income funds over that time period.

In fact, for three bond ETFs, Fed purchases accounted for more than 50% of new cash, including the $6.5 billion SPDR Portfolio Short Term Corporate Bond ETF (SPSB) and the $28.5 billion Vanguard Short-Term Corporate Bond ETF (VCSH) between May 12 and June 16, 2020.

Fed purchases accounted for more than 60% of flows into the $6.3 billion SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB) over the same time period.

Why The Fed Is Buying ETFs
Between May 12 and June 16, 2020, the Federal Reserve steadily bought up shares of 16 fixed income ETFs via its Secondary Market Corporate Credit Facility (SMCCF).

The SMCCF, which was created in March as a response to the extreme market stress, is designed to provide liquidity for outstanding corporate bonds. Among individual bonds and other assets, the SMCCF purchases broad market corporate bond ETFs, both investment grade and high yield. (Read: "Fed Says It Will Buy Corporate Bond ETFs.")

The list of ETFs purchased by the SMCCF is as follows:

 

Fed's Bond ETF Purchases, May 12 - June 16, 2020
Ticker Fund Shares Purchased* Market Value as of June 18, 2020 ($M) Total Net Flows, as of June 18, 2020 ($M) % of Net Flows Accounted for by the Fed
ANGL VanEck Vectors Fallen Angel High Yield Bond ETF 996,639 28.86 316.58 9.1%
HYG iShares iBoxx High Yield Corporate Bond ETF 2,955,540 245.78 6,191.80 4.0%
HYLB Xtrackers US Dollar High Yield Corporate Bond ETF 1,181,933 56.22 693.38 8.1%
IGIB iShares Intermediate-Term Corporate Bond ETF 6,606,823 398.00 2,297.28 17.3%
IGSB iShares Short-Term Corporate Bond ETF 11,127,904 607.81 1,245.64 48.8%
JNK SPDR Bloomberg Barclays High Yield Bond ETF 3,991,415 411.87 2,196.97 18.7%
LQD iShares iBoxx US Dollar Investment Grade Corporate Bond ETF 13,316,690 1,782.97 5,885.72 30.3%
SHYG iShares 0-5 Year High Yield Corporate Bond ETF 538,061 23.34 221.39 10.5%
SJNK SPDR Bloomberg Barclays Short Term High Yield Bond ETF 813,060 20.74 213.42 9.7%
SLQD iShares 0-5 Year Investment Grade Corporate Bond ETF 841,975 43.80 136.34 32.1%
SPIB SPDR Portfolio Intermediate Term Corporate Bond ETF 11,104,934 404.66 671.43 60.3%
SPSB SPDR Portfolio Short Term Corporate Bond ETF 7,577,680 237.26 466.28 50.9%
USHY iShares Broad US Dollar High Yield Corporate Bond ETF 1,262,477 49.02 433.97 11.3%
USIG iShares Broad US Dollar Investment Grade Corporate Bond ETF 2,502,168 150.39 321.07 46.8%
VCIT Vanguard Intermediate-Term Corporate Bond ETF 10,895,898 1,037.07 3,782.47 27.4%
VCSH Vanguard Short-Term Corporate Bond ETF 15,857,256 1,307.91 2,551.90 51.3%

Sources: Federal Reserve, ETF.com; data from May 12 to June 16

 

Which ETFs The Fed Bought
Over the reporting period, the Fed purchased roughly $6.8 billion worth of broad-based, low cost index corporate bond ETFs, mostly in short-term and intermediate-term credit, or a blend of both.

The agency's biggest purchases were the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD), into which the Fed invested $1.8 billion; and VCSH and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which saw $1.3 billion and $1.0 billion, respectively, from the Fed.

Most ETFs the Fed purchased were highly liquid and well-diversified, making them among the safest bond investments around.

One interesting choice, though, was the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL), which tracks bonds under duress or that have been recently downgraded. ANGL is a riskier take on the high yield space, but with a yield-to-maturity of 7.40%, it offers one of the highest yields of any bond ETF currently on the market.

Fed Unwinding: Future Problem?
To date, the Fed has only expended $6.8 billion of the $250 billion the agency is authorized to use in its bond buying program, but the bond market has largely restabilized. In fact, Fed Chairman Jerome Powell announced last week that the agency will ultimately move away from bond ETFs altogether in favor of individual issues.

So if the Fed tapers its buying program, or even begins to unwind its positions, that could potentially lead to a sell-off in some of these bond ETFs—especially the ones for which the Fed represents a majority of new net cash.

Still, any unwinding will likely have muted impact. The Fed's purchases still represent a minimal amount of the total assets under management (AUM) of the ETFs in question. Fed dollars account for anywhere from 0.5% of total AUM for the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) to 6.5% of total AUM for SPIB:

 

Fed's Bond ETF Purchases as % of Total AUM
Ticker Fund Fed Purchases as of June 18, 2020 ($M) Total AUM in ETF ($M) Fed Purchases as % of Total AUM
ANGL VanEck Vectors Fallen Angel High Yield Bond ETF 29 2200 1.3%
HYG iShares iBoxx High Yield Corporate Bond ETF 246 27880 0.9%
HYLB Xtrackers US Dollar High Yield Corporate Bond ETF 56 4840 1.2%
IGIB iShares Intermediate-Term Corporate Bond ETF 398 10690 3.7%
IGSB iShares Short-Term Corporate Bond ETF 608 17820 3.4%
JNK SPDR Bloomberg Barclays High Yield Bond ETF 412 11920 3.5%
LQD iShares iBoxx US Dollar Investment Grade Corporate Bond ETF 1,783 53490 3.3%
SHYG iShares 0-5 Year High Yield Corporate Bond ETF 23 4300 0.5%
SJNK SPDR Bloomberg Barclays Short Term High Yield Bond ETF 21 3200 0.6%
SLQD iShares 0-5 Year Investment Grade Corporate Bond ETF 44 2160 2.0%
SPIB SPDR Portfolio Intermediate Term Corporate Bond ETF 405 6240 6.5%
SPSB SPDR Portfolio Short Term Corporate Bond ETF 237 6600 3.6%
USHY iShares Broad US Dollar High Yield Corporate Bond ETF 49 5330 0.9%
USIG iShares Broad US Dollar Investment Grade Corporate Bond ETF 150 4760 3.2%
VCIT Vanguard Intermediate-Term Corporate Bond ETF 1,037 35660 2.9%
VCSH Vanguard Short-Term Corporate Bond ETF 1,308 28710 4.6%

Source: Federal Reserve, ETF.com

 

Contact Lara Crigger at [email protected]

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