Home ETF News Why My Firm Sold Short-Term Bond ETFs and Bought U.S. Treasury Bills

Why My Firm Sold Short-Term Bond ETFs and Bought U.S. Treasury Bills

by TradingETFs.com



By Vitaliy Katsenelson via Iris.xyz

Recently, my firm replaced all of our short-term bond exchange-traded funds with U.S. Treasury bills. The core motive for this decision was not to pick up a few points of extra yield, though that’s a nice bonus. We sold these ETFs because we were concerned about the low-probability but still possible risk mismatch in liquidity between the ETF and the securities it holds, in the event of a (not-low-probability) panic sell-off in the market.

Our problem with the ETFs concerned liquidity. Liquidity is measured on two dimensions, time and price — it is the degree to which an asset can be bought or sold without impacting its price. For instance, a house is not really a liquid asset. If you want to sell it fast you might have to lower the price significantly to find buyers. On the other hand, stocks of large companies and U.S. Treasury bills are incredibly liquid.

Yet this definition of liquidity is not complete. Liquidity of an asset may or may not be constant — it can change from one environment to another. Today, in a benign economic and market environment, many assets provide a false sense of liquidity. But this may change on a dime when this artificially created calm gets roiled.

Short-term corporate bonds are fairly liquid assets, but they may prove to be less liquid than the ETFs that buy them. During a market scare, if investors were to sell ETFs at several times daily volume, the ETFs in turn would be forced to go out and sell bonds they hold. Supply might temporarily exceed demand, and thus the prices of bonds would drop.



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