Could price data from exchange-traded funds help open-ended fund managers calculate price adjustments?

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.
Published on 13 August 2021
Price data from exchange-traded funds (ETFs), such as net asset value (NAV) discounts and bid-ask spreads, could help some open-ended funds (OEFs) more accurately identify the cost of trading underlying assets.

OEFs are pooled investment structures that can give investors liquidity advantages, such as offering daily redemptions while investing in less liquid assets. However, if the price offered to a redeeming investor does not reflect the cost of liquidating their shares within the redemption notice period, this can dilute the share value of remaining investors, creating an incentive for investors to redeem first. This creates an incentive structure that can amplify redemptions during stressed market conditions.

Earlier this year we published a report on liquidity management in OEFs, based on a joint survey conducted with the Financial Conduct Authority. Our Financial Policy Committee said that OEFs should ensure that redeeming investors receive a price for their units that reflects the discount needed to sell the required portion of a fund’s assets in the specified redemption notice period. In order to do this, and to ensure that remaining investors are not disadvantaged, fund managers can adjust the prices received by redeeming investors. This is known as ‘swing pricing’.

Our analysis shows that swing pricing may not currently fully reflect the cost of sales to meet redemptions. But price data from ETFs, such as NAV discounts and bid-ask spreads, could provide information on the ‘actual’ cost of trading the underlying assets in some OEFs.

During the shock to markets from the Covid pandemic in March 2020, ETFs were more liquid than their underlying assets. As a result, bid-ask spreads for ETFs may have better reflected the ‘true’ trading costs of the underlying assets than the pricing models used by OEF fund managers (Chart A).

Similarly, ETF NAV discounts may have given a better indication of the true cost of selling bonds than the reported spreads on the asset themselves. This information could help some OEF fund managers to calculate price adjustments more accurately, especially during a shock.

To test this assertion, we compared the price and spread information of sterling corporate bond ETFs with the price adjustments (or ‘swing factors’) of sterling corporate bond OEFs with similar asset composition. Comparing ETF and OEF prices is not a perfect solution, as outlined in a report by the Bank for International Settlements. For example, it can be difficult to identify an OEF and ETF with identical assets. However, the price and spreads of similar bonds tend to be correlated, which means that recognising price information from broadly comparable ETFs could allow OEF fund managers to better address liquidity mismatch.

Chart A: In March 2020, ETF price factors and the swing prices of comparable OEFs were substantially different

Median OEF swing price comparison to median ETF bid-ask spread

Two lines, showing difference between median OEF swing price and median ETF bid-ask spread.


  • Sources: Bank and FCA survey responses, Bloomberg Finance L.P., Refinitiv Eikon from LSEG and Bank calculations.
  • The red line denotes the five-day average median open-ended fund swing factor, with the red swathe reflecting the interquartile range around this. The purple line is the five-day average median ETF bid-ask spread, with the purple swathe representing the interquartile range around this. The dashed lines represent the period from 10–23 March 2020.

This post was prepared with the help of Owen Lock and James Semark.

This analysis was presented to the Financial Policy Committee in June 2021. This analysis was previously published in the July 2021 report on market-based finance.

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