COVID-19

What are ETFs and why is the Fed pouring billions into them?

Sabri Ben-Achour May 12, 2020
Heard on: Marketplace
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An all-but-deserted Wall Street. The Fed is making new moves to support corporate debt. Johannes Eisele/AFP via Getty Images
COVID-19

What are ETFs and why is the Fed pouring billions into them?

Sabri Ben-Achour May 12, 2020
An all-but-deserted Wall Street. The Fed is making new moves to support corporate debt. Johannes Eisele/AFP via Getty Images
HTML EMBED:
COPY

The Federal Reserve today started buying up a type of investment known as exchange-traded funds, or ETFs, and it may spend potentially hundreds of billions of dollars on them. 

ETFs are like when you don’t want to invest in just one stock so you invest in multiple stocks, or certain types of stocks.

“People have religious ETFs, gender equality ETFs. They have environmental ETFs that look at companies that don’t pollute,” said Jay Jacobs, head of strategy at Global X ETFs. And ETFs don’t just work for stocks. “You can invest in stocks, you can invest in bonds, you can invest in commodities.”

Corporate bonds really were not doing so well after the coronavirus hit hard in March. 

“People were selling, [and] they were scared,” said Donald Kohn, a senior fellow at the Brookings Institution. Investors were dumping their corporate bonds and the ETFs that were based on them. Which meant businesses couldn’t issue bonds to raise money, or if they could they would have to pay really high interest rates. 

“Having high, rising interest rates where you’re trying to keep businesses going is exactly the wrong thing to have happen,” Kohn said.

It was looking like a lot of businesses wouldn’t make it. Vincent Deluard, director of global macro-strategy at INTL FCStone, did an analysis of small-cap businesses.

“Fifty percent of them did not have enough net cash to last two months without access to credit or revenues,” Deluard said.

So, the Federal Reserve said it would buy corporate debt by buying ETFs full of corporate bonds.

“Imagine if you were trying to buy 1,000 cars — that’s a challenge,” Jacobs said. “But if you went to the dealership and said, ‘I want to buy your entire lot,’ that’s basically what they’re doing.”

And if the Fed is buying corporate debt and telling businesses they can pay it back at low interest, there’s a better chance those businesses will survive.  And if those businesses survive, there’s a better chance the more than 33 million Americans who’ve lost their jobs might get rehired sooner.

COVID-19 Economy FAQs

What’s going on with extra COVID-19 unemployment benefits?

The latest: President Donald Trump signed an executive action directing $400 extra a week in unemployment benefits. But will that aid actually reach people? It’s still unclear. Trump directed federal agencies to send $300 dollars in weekly aid, taken from the federal disaster relief fund, and called on states to provide an additional $100. But states’ budgets are stretched thin as it is.

What’s the latest on evictions?

For millions of Americans, things are looking grim. Unemployment is high, and pandemic eviction moratoriums have expired in states across the country. And as many people already know, eviction is something that can haunt a person’s life for years. For instance, getting evicted can make it hard to rent again. And that can lead to spiraling poverty.

Which retailers are requiring that people wear masks when shopping? And how are they enforcing those rules?

Walmart, Target, Lowe’s, CVS, Home Depot, Costco — they all have policies that say shoppers are required to wear a mask. When an employee confronts a customer who refuses, the interaction can spin out of control, so many of these retailers are telling their workers to not enforce these mandates. But, just having them will actually get more people to wear masks.

You can find answers to more questions on unemployment benefits and COVID-19 here.

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