2022 Perspectives for the Public Sector

22 • Borrowing ETFs is an efficient way for clients to hedge their generic market risk: a leading euro investment grade bond ETF holds over 3,000 bonds while the iTraxx CDS index only offers exposure to 125 issuers and also introduces cash-CDS basis risk. • ETFs can in some cases be lent for multiples of the management fees charged by the ETF manager — making it a positive carry trade. For clients not able to directly trade ETFs due to mandate restrictions, ETFs are playing an important role behind the scenes in opening up fixed income portfolio trading as a new execution protocol for clients. This “all or none” trading technique provides clients with an efficient way to trade diversified baskets of bonds, for example in relation to inflows/outflows, rebalances and rotations, risk targeting and macro hedging/ positioning. The growth of fixed income ETFs has helped to tighten portfolio pricing as a source of bond liquidity — via the ETF creation and redemption process — and as a beta hedge. How Citi can help We have redesigned our internal businesses at Citi to be able to support the growth in ETFs and the needs of our institutional clients as both users and issuers of ETFs. Our business model is unique in that we are a full-service provider but not affiliated with an ETF issuer or an asset manager. We provide an independent platform that investors and issuers can use across the entire ETF life cycle (see figures 4 and 5). How Public Sector Institutions Can Use ETFs Figure 4: Citi’s one-stop holistic ETF platform Custody and Fund Admin Securities Lending Enhanced FX Common Depositary Advisory Distribution and Marketing Issuer Swaps Trading and Market Making Research and Content Markets Securities Services ETFs have evolved beyond traditional portfolio construction and have become important tools for transition management, hedging, cash management and liquidity management, as well as dynamic tactical positioning.