Fed and ECB’s next frontier? Purchase stocks with ETFs


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The Bank of Japan has been doing this for years and it is not unthinkable that other large central banks can follow the Japanese example and buy equity ETFs. A topic that is hotter than ever right now. The Covid-19 emergency has prompted Fed and the ECB to try their hand at hitherto unexplored territories. In particular, the Federal Reserve has made a change in its action (giving a positive shock to the markets) by announcing the QE Infinity on March 23 and that it would purchase corporate bonds for the first time in its history over the past hundred years and the Secondary Market Corporate Credit Facility (SMCCF ) Actually started on May 12 and immediately filled up with ETFs.
The Fed is not the first central bank to buy ETFs under an asset purchase plan. The Bank of Japan has purchased equity ETFs listed in Japan since 2012 as part of its QE program and holds approximately $ 289 billion of assets through replicants (i.e. 76% of the total $ 382 billion of ETF assets in Japan) . And some have already gone as far to predict that in the near future the Fed and some other central banks will also consider buying equity ETFs.

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The example of the Bank of Japan

Fed action could go even further in the near future. The deteriorating economic conditions could in fact push the Fed to go further and purchase equity ETFs. The Boston Fed President, Eric Rosengren, said the central bank may be allowed to “buy one wider range of stocks or assets“, Thus suggesting that the shares could be on the Fed’s shopping list if both short-term interest rates and 10-year Treasuries are approaching zero. The purchase of ETFs could also be considered by the ECB. Peter Kažimír, who sits on the Governing Council of the European Central Bank on behalf of Slovakia, said he does not “rule it out for the future”.
The Bank of Japan buys an annual maximum of 12 trillion yen. The nature of the BoJ’s purchases has changed over time – Cosmo Elms, Head of ETF Business Development of Legal & General Investment Management (LGIM) points out. Initially, it only used ETFs that followed the traditional Topix and Nikkei 225 indices. In 2015, however, he decided to target companies focused on proactive investments in physical and human capital to ETFs. In a time of immense social and economic disturbance, this could be a path that other central banks also wish to take, rather than simply using monetary intervention to support asset prices. ” And a recent study by the National Bureau of Economic Research shows that the buying program appears to have improved valuations of the underlying stocks and has therefore encouraged these companies to make greater use of equity financing and increase their book assets. However, it seems that the money raised by the companies was not invested in a particularly productive way; most of it accumulates in the form of liquidity on company financial statements. There has been a slight increase in employment associated with ETF purchases, but no statistically significant impact on research and development expenditure.
It should be remembered that the BoJ has no voting rights in the companies in which it invests through ETFs. This reflects the stated objective of its purchases to lower the risk premium of the shares rather than influence the choices of the board of directors and therefore does not use its shares to promote ESG priorities.

Here’s what the Fed is buying

Between 12 May and 19 May, the Fed purchased $ 1.58 billion as part of the Investment Grade and High Yield ETFs with a current market value of $ 1.307 billion. The purchases were made in 15 fixed income ETFs, of which 6 are high yield and 11 at investment grade level. The majority (83%) of the investment went to investment grade ETFs, while the remaining 17% went to high yield ETFs.
The SMCCF facility can buy only ETFs listed in the US and whose investment objective is to provide “broad exposure to the American corporate bond market”. Specifically, ETFs that focus mainly on American corporate bonds with investment-grade ratings are available for purchase and the rest will be in ETFs whose primary investment objective is exposure to high-yielding US corporate bonds.
SMCCF will consider several additional factors to determine which ETFs will be eligible for purchase. These considerations include: the composition of debt with investment grade and non investment grade ratings; the style adopted by management for the management of the ETF; the amount of debt held at the ‘depository institutions’ (depository institutions); the conditions of the underlying debt; total assets managed; the average volume of daily trading; and, if present, leverage.
Click here to consult the latest issue of the ETF News.

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