Another day another warning about emerging market debt ETFs.
This has become something of a crusade for us in the weeks that followed Mario Draghi’s efforts to marshal global support for a hawkish shift from DM central banks.
That effort kicked off on June 27 in Sintra, Portugal, and it was followed by a rates mini-tantrum that contributed to outflows from EM bond funds, most notably the iShares JPMorgan EM Bond ETF. Have a look:
We’re not going to rehash the whole story here, but for those interested in the details on why this situation is precarious, you can check out these posts:
- ‘These Are The Most Illiquid Conditions I Have Ever Seen’: One CIO Warns On EM ETFs
- Danger, Will Robinson! Emerging Market Bond Funds See Slowest Inflows In 23 Weeks
- ‘People Are Going To See There’s No Liquidity’: EM ETFs Face ‘Minsky Moment’
In a nutshell, the question is the same as it is for HY ETFs. Namely, what happens when outflows collide head-on with vehicles that promise intraday liquidity against illiquid assets?
The assumption is that this apparent contradiction (i.e. liquidity in the ETF units but not in the assets they represent) will somehow resolve itself through the magic of the creation/destruction process and the arb opportunity for APs.
That, we think, is a dubious proposition.
Well anyway, for those interested in a a granular breakdown of the EM ETF market, consider the following out from BofAML on Monday – it might come in handy down the road.
Do note the breakdown of what these vehicles own in terms of sovereigns versus corporates, as the higher ownership of sovereigns was what recently led to an anomaly in the market that saw sovereigns trading wide to corporates:
Oh, and this bit is key, as it underscores the liquidity argument outlined above and delineated in our previous posts:
ETFs are likely to be disproportionally influential during market selloffs given their limited cash levels to absorb outflows and a more opportunistic investor base.
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