What if fixed income ETF baskets could mimic the index with accurate real-time NAVs, premiums and discounts?

One of the most significant differences between fixed income and equity ETFs is the creation/redemption experience. Typically, with equity ETFs, a market maker knows exactly what constitutes a valid basket – both security and size. The basket composition doesn’t tend to change for size, daily activity or side. Essentially, the basket is the index. With fixed income ETFs, the baskets that are exchanged for creation and redemption units are, more often than not, customized baskets that are a subset of the overall index. If basketing activity is especially heavy on a given day, a market maker may have to wait to receive a transactable basket that would hedge their risk. This mismatch between the immediate transparency of the exchange-traded ETF shares and the OTC nature of the underlying securities creates market inefficiencies.

Enter MarketAxess CP+™ and eNAV

Our breadth of liquidity data and the real-time pricing capability of CP+ (fka Composite+), put us in a unique position to build indices that are comprised of tradeable securities which are priced accurately in real-time. This enables fixed income ETF issuers to offer ETFs where the baskets are the actual index, much like equity ETFs currently. With baskets comprised of tradeable constituents that are supported by real-time CP+ pricing, we can also offer real-time NAVs for the funds, or eNAVs, via our partnership with Virtu. Combining real-time eNAVs with live ETF share pricing allows us to offer real-time premiums and discounts for a suite of tradeable ETFs. And because the eNAV is calculated using a transactable basket, market makers can make more competitive markets. These improvements in pricing and accessibility of bonds will help advance the fixed income and ETF industries so that they are on par with the equity markets.

For questions or follow-up, get in touch with John at jkeller@marketaxess.com

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This is the final blog in our series that dives into the rapidly changing fixed income index market and the issues that will need to be addressed to improve efficiencies in that market. John Keller, ETF Product Manager, utilizes his extensive industry experience to highlight areas of opportunity in Fixed Income indexation.

In case you missed it, read the previously published blogs in the series here:

• What if fixed income indices were comprised of securities that were investable?
• What if fixed income index constituents were accurately priced in real-time?
• What if fixed income index constituents traded on live order books with visible depth of market?