Investors’ confidence in fixed income ETFs is significant

Dan Barnes Welcome to ETF TV, I’m Dan Barnes. Fixed income ETFs have seen significant amounts of investor inflows this year as confidence has been building in the products. Today, we are going to be talking about where that confidence is coming from and the effect on the market.

Deborah Fuhr I’m Deborah Fuhr with ETF TV, and today we’re welcoming Eric Pollackov, the global head of ETF Capital Markets for Invesco. Welcome, Eric.

Eric Pollackov Thank you, Debbie. Pleasure to be here.

Dan Barnes Eric, inflows have been very high this year in space for fixed income. Could you tell us what you think is inspiring investor confidence?

Eric Pollackov I think it really comes down to what I would call the technology that the ETF wrapper provides for investors. And for fixed income, specifically, we saw in March the volatility really kind of took control of the secondary market activity. And then the federal government in the United States stepped in, in April, or at least announced that they were going to step in, in April, didn’t really kind of act on that until May. But what that did was really kind of create this investor confidence with the announcement that they were going to buy exchange-traded funds, as well as high yield and corporate bonds. That kind of brought on this huge rush to bring ETF into the forefront of investors’ portfolios. And it kind of just makes sense, right? The federal government going to backstop the marketplace, and it seems to me that it’s probably a good time to be on their side of the conversation.

Deborah Fuhr One of the topics that’s come up a lot is, how have APs reacted during this volatility? Have they gone away or have they stayed there? What have you seen as the trend?

Eric Pollackov We need to understand what AP actually is; so authorized participants are essentially just large clearing firms for either their own proprietary trading desk or third party trading desks. So APs are the ones that have the ability to create an redeem ETFs in the primary market, not where individual investors or retail investors go to buy on exchange fx. And for the volatility that we saw in both March and April, only authorized participants were still there. They had the ability to use their balance sheet to create and redeem ETFs in a way that was effective to keep the arbitrage mechanism available to the sell-side participants that are making markets. I loathed to see some headlines sometimes around the fact that APs are stepping away from market, because that’s not what happened whatsoever in March.

Deborah Fuhr Yeah, I would agree. I think ETFs clearly busted a lot of myths that they are able to handle inflows and outflows, that the APs are there and they actually performed quite well during, well, year to date. I think another interesting topic that’s come up, as we’ve seen some of these non-transparent, active ETFs come to market is some of the firms that want to launch products are thinking about, could they convert an existing mutual fund into an ETF? Can you share your thoughts on where that might go in the future?

Eric Pollackov It’s never been done, at least in the United States, from what I know historically. But there has been a closed-end fund that has converted into an exchange-traded fund, but again, I go back to my initial comment. The ETF wrapper is generally just a better technology for investors. So there’s clearly going to be some interest to see, ‘hey, I’ve got this large mutual fund. Maybe I should change the wrapper to make it more investable for individual investors and retail investors or institutional investors.’ And then on top of it, we’ve talked about – Debbie, you and I have had this conversation at length for 10-15-20 years – just the tax efficiency benefits that occur, at least in the  United States products, that the ETF wrapper provides is very attractive to many active mutual fund issuers.

Deborah Fuhr Yeah, I’m sure that someone is going to figure out a way to do this. We have also seen a private fund like Syntex has been able to convert private funds into ETFs, two of them so far. I think another topic that is really relevant, and you and I talked about kind of attending events and I’ll be traveling what’s going on, so clearly work from home, COVID-19 has changed the future of, how do you sell and market in the future? Can you share with us your insights as to what you think the future holds?

Eric Pollackov What I would say is that the client base that you currently have, you can get to them via Zoom call like this or Skype or any sort of electronic communications. What I think is going to be greatly affected is trying to get time on somebody who you’ve never met before, where you don’t have an existing relationship or they have investments with you. That equation, if you can solve for that one, I think that’s where you’re going to see the real victims come of this. But again, to the base of your question, I think we really need to stress how important it is to kind of just be able to communicate like we are right now so we can see each other. You know, the days of going out for a state dinner and talking to your clients are probably pretty far off right now. So instead, we need to be able to engage just like we are here on this call.

Deborah Fuhr Yeah. And even events where we often would see each other, I think, are not going to be happening in the short run. So I think virtual events and virtual engagements are really important. And I would agree because you think about the ETF industry today. We have ETFs now in 59 countries. So you really want to think about how and where should you touch investors with the right product sets? So I think it’s definitely interesting times and I appreciate you joining us and sharing your insights. Thank you so much.

Eric Pollackov Thanks for the opportunity.

Dan Barnes I’d like to thank Debbie and Eric for their insights and of course, you for watching. To catch up on our other shows, go to ETFTV.NET and TRADERTV.NET.

Published on July 22, 2020