Global Financial Stability Notes

Fund Investor Types and Bond Market Volatility

By Benjamin Mosk, Felix Suntheim

March 12, 2025

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Format: Chicago

Benjamin Mosk, and Felix Suntheim. "Fund Investor Types and Bond Market Volatility", Global Financial Stability Notes 2025, 002 (2025), accessed March 25, 2025, https://doi.org/10.5089/9798229003087.065

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Summary

This note explores the connection between the varied investor profiles of exchange-traded funds (ETFs) and open-ended mutual funds (OEMFs) and the return volatility of the securities they hold. Based on the security-level data of US ETF and OEMF holdings, the analysis suggests that, on aggregate, a higher ETF ownership share may be associated with lower bond return volatility. However, there is a stark divergence between the behavior of institutional and retail ETF investors and their impact on the underlying market. When a larger share of a bond is owned by institutional investors through ETFs, its volatility tends to be higher. Conversely, retail investors tend to offset this impact of institutional investors. This disparity is not evident for OEMFs.

Subject: Bonds, Corporate bonds, Financial institutions, Financial markets, Financial sector policy and analysis, Financial sector stability, Mutual funds, Securities markets

Keywords: Bond Market Volatility, Bonds, Corporate bonds, ETF share, Exchange-Traded Funds, Financial sector stability, Fund investor type, Global, Global Financial Stability, Institutional Investors, Market Stress, Mutual funds, Open-Ended Mutual Funds, Ownership share, Retail Investors, Securities markets

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