By Chris Dieterich

BlackRock (BLK ) said in a position paper last week that bond exchange-traded funds helped defuse uncertainty and facilitate orderly and stable markets while billions of dollars poured out of Pacific Investment Management Co. in recent weeks.

BlackRock CEO Laurence Fink. Credit: Reuters

BlackRocks paper. which isnt attributed to any specific authors, examined heavy trading in two broad-market bond ETFs, the iShares Core U.S. Aggregate Bond ETF (AGG ) and the Vanguard Total Bond Market ETF (BND ), since Bill Gross departure from Pimco on Sept. 26.

Barrons noted last week that passive bond ETFs were major recipients of cash that moved from Pimco funds after Mr. Gross left the firm he founded.

The crux of BlackRocks argument was this:

Rather than amplify market volatility as some have speculated, ETFs continued to demonstrate their ability to add liquidity to the fixed income markets and act as shock absorbers to high volume activity.

Some background: Banks are keeping fewer bonds on hand than they used to, a trend some worry will make it more costly and difficult for investors to sell bonds when they need to most. A multitude of news outlets have written about how tighter post-financial-crisis regulations have diminished the appeal for dealers to keep large bond inventories and act as speed bumps in times of market stress.

Early last month, the International Monetary Fund issued a report that warned of the illusion of liquidity in the bond market spurred on by strong flows into mutual funds and ETFs in recent years.

BlackRocks own Chief Executive, Larry Fink. was quoted last month in a New York Times article on the matter as it pertains to Pimco and bond-market liquidity:

“We are worried about liquidity,” said Laurence D. Fink, the chief executive of Pimco’s archrival BlackRock, in a conference call with investors this week. “And the question is, do we have enough time before a true liquidity event destabilizes the market?”

It isnt surprising, then, that BlackRock, whose iShares unit is the largest sponsor of ETFs in the world, again advanced the notion that ETFs are part of the solution when it comes to enhancing bond market liquidity.

But their data is compelling, and the juiciest bits of this latest analysis outline how heavy trading in AGG and BND served as a buffer between portfolio managers and the underlying bond market, where many transactions are still made over the phone.

Some more background: Most investors dont directly interact with individual stocks or bonds when they trade ETFs; more commonly, a buyer of 100 ETF shares is matched with a seller of 100 shares in the open, secondary market.

An Investment Company Institute report from September found that, on average, only about one-tenth of stock ETF trading delves into the so-called primary market, where specialized dealers create or redeem ETF shares based on supply and demand. For bond ETFs, that number is about one-fifth of trading, on average, ICI found.

As bond ETF trading ramped up in recent weeks, BlackRock said that every $2.50 in AGG or BND on-exchange trading resulted in just $1 of bonds changing hands in the primary market through ETF creations or redemptions.

The recent spike in bond ETF trading did seem to exert greater influence on the underlying bond market than normal (secondary-to-primary ratio is usually about $4 for every $1), but BlackRock insisted that ETF trading was additive to overall liquidity.

The buffer remained effective and the drop is actually to be expected given the one-directional sentiment over a short time frame.

BlackRock has pointed to the supplemental liquidity ETFs provide in the past. In June 2013, Mark Wiedman, iShares global head, published an open letter to investors seeking to assure clients that the ETF ecosystem was functioning properly during that months bond-market rout.

He went so far as to say:

More and more ETFs are becoming the true market. particularly when market sentiment shifts fast.

This proclamation raised eyebrows. but until the evidence suggests otherwise, markets should welcome the broader adoption of bond ETFs as traditional dealers play a reduced role in the market.