In a report, entitled The Liquidity Test Fixed Income ETFs were due for, Invesco said the NAVs were “meaningless” during the sharp sell-off in March as they did not reflect the true value of the underlying bonds.
The report comes after many bond ETFs traded at all-time high discounts as liquidity vanished in many parts of the credit market.
However, the US giant was keen to shift the spotlight away from ETFs and onto inherent flaws in the fixed income market.
“Investors have come to trust the NAV as an accurate benchmark of value for their mutual fund and ETF portfolios,” the report said. “Looking under the hood to examine how NAVs were calculated during this period has brought to light eye opening issues.”
This, the note said, is particularly prevalent in the bond market where the trades take place over-the-counter (OTC).
This is because there is not one official price to use for bonds when valuing the NAV compared to equities which trade on exchange.
“It is foolish to blindly trust the NAV of an ETF or mutual funds that includes OTC traded securities,” it continued. “We hope this analysis creates a call to action for changes to fixed income market structure and opens doors for new pricing agents with more robust analytics to better handle these situations.”
Similar findings have also been made by the Bank for International Settlements (BIS) and the Bank of England (BoE0 which said ETF prices provided information about future changes in the underlying assets.
When ETFs were trading at wide discounts, the BoE said this showed NAVs were not factoring in the latest price information compared to an ETF which was trading intraday on exchange.
Furthermore, an ETF Stream survey of 50 fund buyers across Europe found 80% of respondents had either increased their appetite for bond ETFs or had not changed their view following the all-time high discounts.
Invesco said it is not entirely fair to place all of the blame on third party calculation agents as they are tasked with trying to value a bond with no traded price to reference.
However, the firm added it did highlight the need for enhancements to fixed income market structure as well as improvements in NAV calculation methodologies.
“More OTC markets should have central reporting of trades and prices, with this data then broadly being distributed to market participants with minimal delay.
“Additionally, there should be more reliance placed on traded prices than stale or non-executable dealer quotes.”
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