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Last spring, when fixed-income markets in Canada were especially hard-hit, exchange-traded funds proved their ability to continue to deliver liquidity, according to speakers at a recent webinar hosted by the Association of Canadian Pension Management. That lesser-known benefit is contributing to a change in the way institutional investors are using ETFs. 

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“We basically saw the fixed-income market go no-bid,” said Matt Montemurro, director and portfolio manager, BMO Exchange Traded Funds, during the webinar, recalling the situation in March 2020 when the coronavirus pandemic was first declared. “We were challenged for liquidity and I think one of the things that we learned was that ETFs, once again, through a crisis, provided a liquidity vehicle [and] also a price discovery tool for investors.”  

At the time, listed bond prices didn’t change much because anything other than very liquid, very short bonds wasn’t trading; however, investors trying to sell a bond would be offered 5 to 10 per cent less than the bond appeared to be worth, Montemurro pointed out. 

Traditionally, said webinar moderator Mark Webster, director of BMO Global Asset Management, institutional investors have used ETFs primarily for transition management. However, their reasons for employing ETFs have broadened significantly over the past five years and the tumultuous last 14 months has likely accelerated that trend. 

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Particularly in the fixed-income space, Montemurro agreed, institutions are looking to ETFs as another tool in their toolkit that can, among other purposes, serve as a long-term strategic holding, provide efficient access to foreign markets, enable tactical adjustments, fill gaps in strategic asset allocation, manage risk between rebalancing cycles and accomplish liquidity management.

The additive value of ETFs is something Peter Haynes, managing director, TD Securities, also emphasized during the webinar: “It’s very important to not try to suggest that there is some miraculous found liquidity in one instrument that doesn’t exist in another. It is another layer of liquidity that the ETF market makers and the ETF market provide.”