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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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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
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 are the details of President Joe Biden’s coronavirus relief plan?

The $1.9 trillion plan would aim to speed up the vaccine rollout and provide financial help to individuals, states and local governments and businesses. Called the “American Rescue Plan,” the legislative proposal would meet Biden’s goal of administering 100 million vaccines by the 100th day of his administration, while advancing his objective of reopening most schools by the spring. It would also include $1,400 checks for most Americans. Get the rest of the specifics here.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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