The Primary Market Process for Fixed Income Exchange-Traded Funds Under Market Stress

The authors provide empirical evidence on the functioning of the primary market for iShares fixed income exchange-traded funds (ETFs) during the Covid-19 crisis, the first analysis of custom redemption baskets in the growing literature on ETFs. The authors show that the primary market process worked as expected despite the high level of market stress. Contrary to recent suggestions that asset managers actively discouraged redemptions in stressed markets by offering less desirable bonds, the authors demonstrate that iShares redemption baskets during the crisis were reflective of the factor characteristics of the fund itself.