The Wall Street Journal - 28.03.2020 - 29.03.2020

B12| Saturday/Sunday, March 28 - 29, 2020 **** THE WALL STREET JOURNAL.

Eli Lilly workers prepared drive-through Covid-19 testing in Indianapolis.

MICHAEL CONROY/ASSOCIATED PRESS

What doesn’t kill a useful finan-

cial instrument will probably make

it stronger.

During both the coronavirus

selloff and this week’s stock-mar-

ket bounce, big gaps have opened

up between the value of exchange-

traded bond funds and that of

their holdings. Over the past two

weeks, the iShares iBoxx $ Invest-

ment Grade Corporate Bond ETF—

the largest of its type—has traded

at both its largest discount and its

largest premium to net asset value

in 11 years.

ETFs have long been a popular

way for investors to track equity

indexes, but over the past decade

they have come to dominate bond

markets too. Many professional in-

vestors, however, suspect them of

posing a 2008-style systemic risk

—fears to which signs of stress

lend weight.

The issue, they argue, is that

ETF shares are easy to trade in

good times, obscuring the fact

that many of the corporate bonds

held, particularly those rated be-

low investment grade, become

hard to sell in bad times. This illi-

quidity can then spread to the

ETFs, which are passive vehicles

that can’t remove problematic is-

sues from their baskets. As inves-

tors rush to sell their ETF shares,

the pain could infect even resil-

ient bonds.

Furthermore, middlemen may

find it hard to buy and cancel

shares, which is how ETF liquidity

is ultimately backstopped, because

doing so would involve absorbing

illiquid bonds that would be pro-

hibitively expensive to hedge.

So far, though, this nightmare

contagion scenario hasn’t played

out, despite extreme market

moves. Instead, ETF prices have

become “the effective benchmark

prices of the underlying market,”

analysts at French bank Société

Générale point out. Bond prices

may need to catch up, but this

doesn’t mean something is funda-

mentally broken.

Some ETF prices may now be

more “real” than the markets they

track—a reversal that should inter-

est the philosophically inclined.

This isn’t unlike how oil futures

contracts have superseded actual

spot transactions as a way to mea-

sure the price of crude.

In today’s globalized, highly

complex financial markets, top-

down macroeconomic information

may simply be more relevant than

bottom-up facts. During the coro-

navirus selloff in particular, trad-

ers have often been clueless about

the worth of individual issues,

while still having strong views

about the economic shock. They

have expressed them primarily

through ETFs.

Investors should still avoid com-

plex, poorly designed ETFs, like

the inverse-volatility ones that im-

ploded in 2018, or those that track

assets too illiquid to have a rea-

sonable price. But the fact that

even junk-bond ETFs are function-

ing properly suggests that the

threshold is higher than some

feared.

For those still doubtful, the U.S.

Federal Reserve’s announcement

this week that it would buy shares

in investment-grade corporate-

bond ETFs as part of its stimulus

policies—even though it is also di-

rectly buying the underlying

bonds—sends an “all clear” signal.

This is a piece of financial engi-

neering that has become too useful

to fail. —Jon Sindreu

Out of Sync

iShares iBoxx $ Investment Grade

Corporate Bond ETF

Source: FactSet

$140

100

110

120

130

Feb. 2020 March

Share price Net asset value

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Grocery Delivery’s Unexpected Stress Test

Supermarkets weren’t ready for the surge in online orders, but they’re learning on the fly

Mixed Bag

Web orders as a share of overall

grocery sales

Note: year through June 2019

Source: Kantar

China

U.K.

France

U.S.

Spain

15.2%

7.6

6.2

3.1

2.4

ETFs Prove Their

Mettle in a Crisis

Exchange-traded bond funds emerge as an

intergral part of today’s financial architecture

If the Covid-19 outbreak pro-

vides a global test for buying food

online, it is one that supermarkets

are by and large failing. Yet their e-

commerce businesses should be in

a different league after the crisis.

Since the pandemic began, the

websites of major food retailers

have been as inundated as their

physical stores. Pressure on these

still-small online operations is

only likely to increase as more na-

tions place their populations on

full lockdown.

Average daily traffic toWal-

mart’s grocery site reached 1.1

million between March 1 and

March 20, according to analytics

company SimilarWeb—a 55% in-

crease on average daily visitor

numbers during the previous two

months.Kroger,Peapod,Insta-

cart,CarrefourandTescohave

also experienced big surges in

daily traffic. The number of U.S.

households ordering groceries on-

line roughly doubled this month

to 40 million compared with lev-

els recorded in August 2019, data

released Thursday by consulting

firm Brick Meets Click shows.

Although supermarkets have in-

vested heavily in their online

businesses in recent years, they

are not ready for current levels of

demand. Infrastructure is still im-

mature globally: 7.6% of groceries

in the U.K. were bought over the

web before the outbreak, while in

Spain just 2.4% of sales have

moved online, according to Kantar

data. The U.S. has around 3.1%

penetration.

During the pandemic, it is prov-

ing harder to ramp-up capacity

quickly online than in physical

stores. Automated warehouses in

the U.K., like the ones that Kroger

is currently building with grocery-

tech companyOcadoin the U.S.,

need time to increase output. And

getting additional delivery vans on

the roads is complicated by the

fact that they need to be specially

equipped with refrigerators for

chilled orders.

That is leading to a frustrating

experience for web shoppers in

many markets. U.S. consumers face

delays when using the services of

retailers such as Walmart andAm-

azonFresh. Ocado, which runs one

of the most advanced e-commerce

operations in the U.K. in partner-

ship with local retailer Marks &

Spencer, is no longer accepting

new customer registrations. The

risk is that some consumers trying

the service for the first time will

be turned off for good.

Still, some retailers are betting

that the extra demand will stick.

Ahold Delhaize, owner of the Pea-

pod delivery service, has doubled

its server capacity in the U.S.

since the crisis began. Its website

will be able to handle much

higher order volumes after the

spike subsides.

The rush of orders is bringing

some benefits. Online grocers are

learning how to allocate delivery

slots most efficiently in times of

peak demand. They are testing in

real time how different order-ful-

fillment methods, such as manual

picking in stores or from dedi-

cated online warehouses, perform

under stress.

But the constrained capacity on-

line also has one important advan-

tage. Sales delivered to a shopper’s

home are far less profitable than

those made in stores. Grocers need

time to manage the shift online to

avoid a big hit to their already thin

operating margins.

Online grocery businesses may

be struggling at the moment, but

they will emerge from their unex-

pected trial better equipped for

the future.

—Carol Ryan

SIMON DAWSON/BLOOMBERG NEWS

Delivery vans parked a fulfillment center for grocery-tech company Ocado in southeast London Wednesday.

OVERHEARD

Zoom has been one of the

hottest stocks on the market

this year—just not the Zoom

you think.

Shares of Zoom Technolo-

gies have surged 10-fold since

the first of the year. But most

of those traders likely think

they are buying Zoom Video

Communications. The latter is

a Silicon Valley wunderkind

that developed a videoconfer-

encing service, which has

proven to be hugely popular

with a world now stuck work-

ing at home. The former is a

Chinese company that once

made modems and hasn’t filed

any public financial documents

since 2015.

Some confusion is under-

standable. Zoom Technologies

benefits from having the more

intuitive ticker symbol, ZOOM.

It also benefits from being

hard to find. A Google search

for “Zoom Technologies Inves-

tor Relations” leads to Zoom

Video’s IR page. The Securities

and Exchange Commission ap-

pears to have had enough. The

agency announced Thursday

that it has suspended trading

on ZOOM, citing “the public in-

terest and the protection of in-

vestors” in its orders.

They should have known

something was amiss earlier.

Zoom Video went public in

April 2019, and it had an im-

mediate effect on trades of the

other Zoom. Still, the wrong

ZOOM was selling for a buck a

share at the first of this year,

and investors who picked it up

then could have sold for $20 a

share at the end of last week.

Not bad for a sucker’s play.

Only one of these stocks (the

one above) is camera-ready.

Drugmakers See Plans

For New Drugs Upended

Pharmaceutical companies tend

to be relatively safe places to in-

vest during economic shocks, but

even they aren’t immune to the

ripples from Covid-19.

Demand for prescription medi-

cation is mostly insensitive to the

economy. Drug companies have

strong balance sheets and pay sta-

ble dividends—desirable invest-

ment traits in a weak economy.

And in the short term, prescrip-

tion activity could actually in-

crease as patients stock up on

medication.

But big drugmakers haven’t

been much of a haven. A broad in-

dex of pharmaceutical stocks is

down about 15% this year through

Thursday. That isn’t much better

than the benchmark S&P 500,

which has lost 21%.

One difference is that the major

economic shocks in recent history

weren’t caused by a health crisis.

This time, the chaotic state of hos-

pitals across the U.S. and Europe

will affect drug development—the

source of future revenue for re-

search-led companies.

Earlier this week, Eli Lilly said it

would delay the start of most new

studies and pause enrollment in

most trials under way, though tri-

als will continue for patients who

have enrolled. Smaller biotech

companies, like Bluebird Bio, also

have announced delays.

Many health-care systems have

had to restructure operations to

care for a surge in patients with

Covid-19 and “limit or cease”

other activities, Lilly said in a

press release. Trial enrollees might

need to stay home in the era of so-

cial distancing, especially those

who are ill.

What is more, many drug com-

panies have diverted their research

efforts toward solving the Covid-19

health emergency. That is obviously

the right thing to do for patients,

but treatments for the disease are

unlikely to be major business op-

portunities for the industry.

That shift of resources won’t af-

fect financial results right away,

but the delays are bound to

weaken research productivity over

time. There are nearly 150,000 tri-

als under way for experimental

drugs, according to the Journal of

the American Medical Association.

Slowed-down development is an

obvious worry for smaller biotech

stocks, which rely on access to the

capital markets to fund operations.

But bigger companies aren’t ex-

empt from the pressure. If new

drugs don’t arrive to replace older

ones facing generic competition,

profits could become squeezed in

the years ahead.

Drug investors should be moni-

toring the situation carefully.

—Charley Grant

Hospital chaos is already

causing delays in drug

development—a key

source of future revenue.