Index-tracking fixed-income ETFs have experienced an explosive growth spurt to reach $1 trillion in 2020. However, they suffered significant disruptions during the Covid-19 crisis. We show that bank balance sheet constraints were likely a contributing factor to these disruptions because bond...

Exchange-traded funds (ETFs) are typically viewed as passive index trackers. In contrast, we show that corporate bond ETFs actively manage their portfolios, trading off index tracking against liquidity transformation. In our model, ETFs optimally choose creation and redemption baskets that...