"The Federal Reserve on Monday announced a fresh round of stimulus designed to calm markets and buffer the hit to the economy from the coronavirus pandemic. Among other steps, the Fed said it would buy exchange-traded funds that track the corporate bond market, a first for the U.S. central bank.....On Monday, after the Fed’s announcement, LQD had gained about 6% and a competitor, Vanguard's Intermediate-Term Corporate Bond Fund VCIT, +5.42% , was about 5% higher....."
".....Under a program called the Secondary Market Corporate Credit Facility, the Federal Reserve will be able to purchase corporate bonds, not just Treasuries. That alone is big news, but this program also allows for the purchase of ETFs that track the U.S. investment grade corporate bond market.....That means buying corporate bond ETFs like iShares Investment Grade Corporate Bond ETF [LQD] or Vanguard Long-Term Corporate Bond ETF [VCLT]. Both were up about 7% today.....The Fed made a point that it’s buying spree would be only in investment grade corporate bonds, not high yield. Not surprisingly, high yield ETFs like iShares High Yield Corporate ETF [HYG] were down 1.6%.....The buying power is not unlimited — the Fed cannot own more than 20% of any one ETF, or 10% of individual corporate bonds....."
While some are criticizing the Fed/NY Fed for relying on BlackRock for the new bond purchase program, it should be noted that:
1. BlackRock already manages the federal TSP program funds [except for the SV G Fund].
2. BlackRock managed some asset programs for the Fed and/or Treasury during/after the financial crisis.
3. BlackRock can launch the program quickly and is offering super-low fees to manage the bond program:
CMBS: 2 bps for the first $20 billion; 1.25 bps for the next $30 billion; 0 bps above $50 billion [so max annual fee $7.75 million]
Corporate Bonds: No fees [this may be misreported by Yahoo Finance; FT mentions fees but doesn't say how much; fees may very well be like the above for CMBS]. Already noted in the OP is the limitation of 10% of outstanding from any corporate issuer with investment-grade rating.
Bond ETFs: No fees. Moreover, it will rebate the ERs if it uses its own bond ETFs [LQD, etc]. Unclear what happens if it uses bond ETFs from other fund families and whether it can make a deal to split those ERs. Already noted in the OP is the limitation of 20% of outstanding of any corporate bond ETF. A rationale for using ETFs is that the corporate bond market is quite fragmented and the ETF route allows picking up lot of corporates in a few transactions. #1 corporates LQD AUM is only $37 billion, #2 VCIT AUM only $25.7 billion, so $12.54 billion in corporates can be picked up quickly this way from just those 2 - that is not a huge number for the Government. Of course, there may be piggyback inflows from investors into the ETFs used in the program and the ETF sponsors will get to pocket those ERs.
Edit/Add: I found the contract at the NY Fed website. But it deals with CMBS only and not with corporate bonds or bond ETFs, So, some questions about those remain. https://www.newyorkfed.org/medialibrary/media/markets/special_facilities/ima-blackrock-fma