Another milestone occurred for the ETF industry this month as a Goldman Sachs short-term Treasury fund was used in early November to meet initial margin requirements for derivatives trading by a hedge fund at the CME. We believe this opens the door for additional institutional usage of fixed income ETFs.
In August 2022, the CME group initially announced that it would permit clearing members to use ETFs in an effort to give clients greater flexibility and increased efficiency in managing their collateral costs. Using an ETF mitigates the need to re-invest maturity proceeds for individual U.S. Treasury securities.
“We are very pleased to provide our market participants with additional capital efficiencies by continuing to expand the types of collateral we accept,” said Suzanne Sprague, senior managing director and global head of clearing & post-trade services at the CME in August. “We’ve worked closely with ETF sponsors to ensure that this new collateral both meets our rigorous risk management standards and offers a broader range of collateral choices for clearing members.”
According to Goldman Sachs, a trade of 10,000 units of the Goldman Sachs Access Treasury 0-1 Year ETF (GBIL ) was successfully settled with the CME in early November. This appears to be the first such settlement using an ETF to occur, but we expect the trend to persist as asset managers educate heads of operations and chief financial officers about the benefits of owning ETFs instead of Treasury bills directly.
Institutional investors have been slower to use fixed income ETFs than advisors and retail investors, but once they get comfortable, we find that usage accelerates. For example, insurance companies primarily only invested in equity ETFs for years. However, in 2021, fixed income ETF usage by insurance companies grew by 23% and ended the year representing 36% of insurance company ETF assets.
GBIL operates differently than other short-term Treasury ETFs, which should boost its institutional appeal. “In addition to the typical intraday trading ease of ETFs, GBIL offers two daily net asset values, allowing authorized participants to create or redeem shares twice a day,” explained Michael Crinieri, global head of ETFs within Goldman Sachs Asset Management. “This feature enhances the liquidity of the ETF and provides a unique set of use cases.”
Launched in 2016, GBIL manages $4.2 billion in assets aided by $2.4 billion of net inflows in 2022 due to advisors turning to the modestly priced, low-risk ETF for stability and income. At the end of October, GBIL sported a 3.4% 30-day SEC yield and had a modest expense ratio of 0.12%. The ETF had an average duration of just 0.3 years. Great institutional usage of GBIL will help improve its liquidity and keep the ETF’s trading costs low for all investors.
For more news, information, and strategy, visit VettaFi.
