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ETFs to watch amid coronavirus market volatility

Ben Johnson, Morningstar's Director of Global ETF Research, joins Yahoo Finance's Seana Smith to break down which ETFs investors should be watching amid the coronavirus market volatility and more.

Video Transcript

SEANA SMITH: It's now time for our ETF report brought to you by Invesco.

So earlier this month, the Fed announced that it was expanding its bond buying, and would now include companies recently downgraded into junk territory, as well as junk bond ETFs. So we want to talk a little bit more about this. And we have Ben Johnson, director of Global ETF Research at Morningstar.

And Ben, let's just talk about what the Fed is doing and what this could mean for junk bonds. Because when we think about junk bonds, we think about what is traditionally a riskier asset. And now there seems to be some more support, or now there is support for them in the market. So how are investors responding to this? And how much demand do you expect there to be for a junk bond ETFs amongst investors?

BEN JOHNSON: Well, what we've seen today, the Fed has indicated that it might at some point in the future purchase either investment-grade, corporate-bond ETFs, or junk bond ETFs. But what it has done today in regard to both of those is absolutely nothing. So as of April 9, it is yet to actually make any of those purchases.

Meanwhile, investors have all been positioning themselves to effectively front run the Fed. So if you look at flows into LQD, which is the iShares investment-grade corporate-bond ETF, since the Fed made its first announcement on March 23, those have amounted to nearly $10 billion. That fund has gone from trading at a pretty steep discount to its net asset value to now trading at a premium to its net asset value.

And what you've seen subsequently following the Fed's announcement that it would expand this program to include junk bonds and junk bond ETFs is that there's been a billion dollars that's flowed into LQD's high yield sibling HYG. So again, evidence of investors trying to position themselves to get out in front of the Fed, which for its own part has done nothing, has not purchased a single share of any of these funds.

SEANA SMITH: It's interesting, what we're seeing play out right now in junk bond ETFs.

Ben, I want to take a step back and just talk about the ETF sector really at large. When we talk about the number of launches in the ETF sector, there really hasn't been too many over the last several weeks. The numbers there have slowed significantly. What kind of impact is that having on the ETF market? And I guess, how long do you expect it to be until we see those numbers return to a more normalized level?

BEN JOHNSON: Generally speaking, even if you look back to before this whole crisis, what we had seen was a gradual slowing in the terms of net new ETF launches. We've actually seen record numbers in recent years of ETF closures. And that's really just a sign of the natural maturation of the space.

That said, we have seen some new funds come to market in recent weeks. Most notably American Century has just launched their first actively-managed nontransparent ETF. This is a fund type that's been over a decade in the making.

And looking back, this could mark really a sea change in the way that asset management strategies are packaged and distributed to investors, or it could mark a concept that ultimately fizzles out, but certainly noteworthy, especially given the volatility that we've seen in the broader market, and many of the concerns that the SEC had with this format that caused it to push back for the better part of a decade and make the providers of these funds jump through a lot of hoops and do a lot of gymnastics to finally get these products out on the market.

SEANA SMITH: And certainly it is interesting to see what's playing out in that sector right now. Ben Johnson of Morningstar, thanks so much for joining me today.

BEN JOHNSON: Thanks for having me.