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:
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:
Source: Federal Reserve, ETF.com
Contact Lara Crigger at [email protected]