ETFs ensure more liquidity in the bond market

B.Exchange-traded index funds, or ETFs for short, have developed into a popular instrument within a few years, which investors can use to speculate on the markets at short notice. In Europe, investors have put significantly more funds into ETFs in recent months than the long-term average. Part of this may be due to the return of funds that were withdrawn in March, but that 25 billion euros were made up in June.

But who are the buyers? “I can only confirm to a limited extent that these are only private investors,” says Stefan Kuhn, head of Germany at the ETF provider SPDR, which belongs to the State Street fund company and is the world’s third-largest provider of exchange-traded index funds. In the European market dominated by Blackrock and iShares, SPDR is one of the medium-sized market participants. “It is true that private investors are definitely on the move and that institutional investors find it a little more difficult at this market level. But the structure of the cash inflows says otherwise. “

The current inflow of funds is not necessarily driven by speculation, even if the professionals often prefer to use special funds to make strategic investments. This is often cheaper than an ETF for them. “But it is also a question of time and cost whether you always write out a mandate right away. That is why institutional investors like to use ETFs for short-term investments, but also when it comes to making slight adjustments to their positioning. “

Equity ETFs are less in demand

Another argument against the thesis of speculative stock market investments is that stock ETFs are not as popular as Kuhn reports. According to data from the ETF provider Lyxor, funds in equity ETFs rose by less than two billion euros this year. On the other hand, of the 56 billion dollars that flowed into ETFs, 27 billion were put into bond ETFs, says Kuhn. “Commodity ETFs were also in demand, and among them especially those who invest in gold, especially in Europe.” In this way, investors have adjusted their portfolio risks to the current circumstances, although the question is always whether that is because I will stay that way.

There is also a structural reason for the fact that bond ETFs are so popular. “The liquidity of the bond market has fallen sharply in recent years. Large blocks of around 100 million euros can hardly be traded. But in an ETF this is spread over roughly 200 bonds. This means that ETFs spread the liquidity and that works. “

It is always said that ETFs are only as liquid as the underlying assets in which they invest. Here, however, they created a second layer of liquidity, not least due to the fact that the market makers usually took sold shares onto their own book and did not exchange them with the provider for the underlying assets – precisely because the ETF shares were easier to trade than the underlying assets themselves. And in general, the bond ETF market is shaped by institutions. Private banks have also discovered this – probably for their customers – because “bond picking” as it once was was no longer possible, but that is only part of the trend.

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In addition to bond ETFs, thematic ETFs are currently also in demand, a sometimes controversial investment where providers are often told that these are short-term and speculative products. “It is not our aim at all to find topics that work in the short term,” says Kuhn. “That is why we offer what has proven itself and that is primarily our sector ETF. This year, health, high-quality consumer goods and technology are in particular demand. ”Although the latter is older, he now benefits from the trend towards home office, among other things, and has received a new boost from the Covid 19 pandemic.

With a view to the stock market, one is currently “cautiously constructive”. “The economic data and the market development don’t want to go together,” says Kuhn. “Investors are currently torn between the conviction that the market has gone too far and that the economic data are better than feared.” There are definitely other topics such as the US-Chinese trade conflict or the presidential elections in America.

“Wall Street is not afraid of President Biden. But there are differences. ”If Donald Trump remains, who also regards the stock market as a measure of his own success, the stock market as a whole will continue to run. “If Biden becomes president, it will be more exciting, but not negative. Biden’s stance on the stock market is less clearly positive. It will depend on which currents prevail among the Democrats in the end. ”With regard to the trade conflict, Kuhn does not necessarily expect major changes. “Above all, Biden is less loud than Trump, but there are protectionist currents among the Democrats too.”

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