Why Your Supposedly-Stable Fixed-Income ETF Fell Off A Cliff

Interest rates have been going down — that means fixed income prices should be going up. But even when rates rise, fixed income is supposed to be the stable asset class. So why is the Pimco Enhanced Short Maturity Active ETF (MINT), which has negligible credit or term risk, trading 4% below its March 2, 2020 close? iShares Core US Aggregate Bond ETF (AGG) bounced off its low and is now 2.6% below its March 2nd, level, but it had in recent days had fallen to 8.8% below where it started the month. The iShares iBoxx $ High Yield US Corporate Bond ETF (HYG) is nearly 20% below its March 2nd close. Quick declines like these are passé in the equity market, but in the context of fixed income, the relatively stable asset class, these are downright frightening. There are some bread-and-butter economic factors at work here, but much stems from what are known as ETF “creation units.”

© Can Stock Photo/ curvabezier

Your fixed-income ETFs 😦

Introducing The ETF, Otherwise Known As The CEF-Done-Right

Did you ever wonder why ETFs, unlike Closed-End Funds (CEFs), always trade very close to asset value, so much so that the differences between ETF share prices and Net Asset Values (NAVs) are barely noticeable to the ordinary investor? You’d think they’d be the same. Both are corporations whose business involves ownership and management of an investment portfolio. Shares of ETFs and CEFs are among the kinds of stocks that trade with reference to asset values; others include REITs, energy stocks and mining stocks (value of reserves). The mechanism that keeps stock prices close to NAV, something ETFs have but CEFs lack boils down to two words: creation units.

Creation units have always been right under your nose, but unless you’re an associate in a large law firm being paid ridiculous amounts of money to read (or in their cases, even worse, write and proofread) that deeply into the prospectus, you’ve probably never noticed them. I can’t explain why I know about them — maybe my wife is right when she tells me I should see a shrink. 

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