What could a European Central Bank ETF buying programme look like?

Bank of Japan and Federal Reserve run very different ETF purchasing programmes

Tom Eckett

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With the Bank of Japan (BoJ)and the Federal Reserve both propping up markets through ETF purchases, it seems only a matter of time before the European Central Bank (ECB) also delves into the world of exchange-traded funds.

How the central bank does this, however, remains a key question. The BoJ, which started ETF purchases a decade ago, has an entirely different approach to the Fed.

Japan’s central banklooks to support the economy by buying local-listed equity ETFs while the Fed has employed BlackRock to execute ETF purchases in both the investment-grade and high yield ETF arenas.

The BoJ now controls around80% of Japan’s entire ETF market, something the ECB will certainly look to avoid.

If the European Union’s central bank did start purchasing ETFs, it is far more likely it will copy the route the Fed has taken in the bond market. The US central bankhas poured $6.8bn assetsinto broad-based corporate bond ETFs since the start of May, as at 16 June.

As Kenneth Lamont, senior research analyst, passive strategies, at Morningstar, said: “If the ECB does choose to buy ETFs, we will likely see an approach more similar to thattaken by the Fed in the US.

“I highly doubt that the ECB will pursue [the BoJ’s] strategy and if in the unlikely event that equity ETFs are bought at all they will target broadest market-cap indices.”

Since it started its bond-buying strategy following the Global Financial Crisis (GFC), the ECB has been purchasing euro-denominated non-financial corporate debt, a process it could look to replicate allocating assets to ETFs.

Therefore, Lamont suggested it will consider an ETF such as the €1.7bn iShares € Corp Bond ex-Financials UCITS ETF EUR (EEXF) which removes financials.

Unlike the Fed, however, the ECB is the central bank of 19 EU countries and therefore would need to be allocating assets to securities in all these countries.

As Paolo Giulianini, ex-head of ETP trading at UniCredit, noted, many euro-denominated bond indices have a 20%+ weighting to US issuers. This is the case for EEXF which currently has a 22.4% exposure to the US.

There are a few ETFs which only include securities from European countries. One such product is Tabula Investment Management's €102m iTraxx IG Bond UCITS ETF EUR (TTRX), however, size will be a factor here for the ECB.

Another option is the central bank could put out a specific tender for the creation of a new index that gives the specific breakdown it wants of the 19 EU countries.

Plenty of food for thought for the ECB but if the markets revealed anything in March, it is that ETFs still trade efficiently during periods of extreme volatility.

The nod to the wrapper came when the Fed started its ETF purchases; a move by the ECB would only go to cement this, especially in Europe where the ecosystem is around seven years behind in terms of maturity.

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