We will review the recent behaviour of equity ETFs and particularly fixed income ETFs, in order to understand price action by market participants and respond to different myths and realities that exist regarding fixed income ETFs.

Equity ETF trading

Equity ETFs have generally been trading as expected in the secondary market within the creation and redemption cost range either side of the net asset value (NAV), albeit with a wider range than normal. As expected, any ETF trading significantly higher or lower than its primary market creation or redemption cost has experienced the normal arbitrage process to bring the ETF price back in line close to NAV. The transparency of the equity market structure has helped ETF brokers have relative certainty and confidence when pricing intraday or similar versus NAV. This has been further supported by equity indices which use transparent and generally achievable official equity close prices for their index levels which ETF NAVs are referenced to.

Fixed income ETF trading

In fixed income, the bond market has moved rapidly during the COVID-19 period along with credit spreads to levels not experienced since 2008. At a time when bond liquidity has significantly reduced, fixed income ETFs have performed well.

Firstly, despite the prominent reduction in underlying bond liquidity we have seen unprecedented trading volumes for fixed income ETFs. The structure of the ETF ecosystem allows trading to take place in the secondary market without execution of the underlying securities or the creation redemption of ETF units, thus enhancing overall ETF liquidity. Subsequently, during the COVID-19 period, we have seen a material increase in the secondary to primary market ratio of fixed income ETFs.

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This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.

DWS Investment GmbH; April 2020
CRC 075200 (04/2020)

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