Concerns around fixed income ETFs will 'never be put to rest' – Howie Li

Investors will always be “trying to find reasons for ETFs to not do their job”, according to head of ETFs at Legal & General Investment Management (LGIM) Howie Li, who is “glad” the passive instrument was put to the test during the coronavirus-induced market turmoil earlier this year as it “did what it was supposed to do” and he no longer has to “battle those questions that we have all been having to answer over the past decade”.

Speaking particularly about bond ETFs, Li explained that after an initial concern around spreads, discounts and premiums in passive fixed income during March and April, it became quickly apparent that the underlying bonds were facing the same issues and the ETFs were offering a “clear, transparent and real-time” analysis of what was happening in the underlying markets.

“Previously, it would just be the bond buyers or managers who would see these kinds of widening spreads on the underlying instruments, but all of a sudden these ETFs are giving… the kind of information that people did not really know about,” he explained.

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Bond ETFs also offer investors a choice to manage their liquidity risk, Li added, as rather than the risk of a fund being suspended, the ETF relies on the secondary market to be able to provide investors with the option of paying the spread and exiting the space, or to simply “hang tight”.

On 23 March, the US Federal Reserve established the Secondary Market Corporate Credit Facility (SMCCF), which hired BlackRock to purchase bond ETFs as part of its attempt to ease the economic and financial consequences of the coronavirus pandemic, an occasion that marked a “seal of approval”, further quieting questions around the asset type.

As of 31 August, the SMCCF had purchased $8.7bn of bond ETFs, according to its own disclosures.

The conversation around ESG is set to change as it shifts from choice to hygiene, according to Li, because the acronym “affects every single business, every single mature sector” and he suggested much of the outflow from “traditional equity building blocks” might head to their ESG replacements.

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With an engagement team spanning fixed income and equities, LGIM utilises each to impact the other, he explained, because while bonds do not offer “a seat at the table to vote”, they are how a business attracts new capital and if they are consistently voted against due to “poor processes”, the business will suffer “a lack of appetite to buy up new debt issues”.

“If you are doing a fundraising and you cannot raise the funds at the level you want, that is going to affect your business strategy.

“That is how asset managers such as LGIM, that run equities and fixed income, take a kind of holistic approach to voting that can really have an effect of the fixed income side.”


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