UPDATE 1-Federal Reserve will begin purchasing exchange-traded funds on Tuesday

(Adds more details about the facility)

NEW YORK, May 11 (Reuters) - The Federal Reserve will start purchasing shares of exchange-traded funds that invest in bonds on Tuesday through its Secondary Market Corporate Credit Facility, the central bank announced on Monday evening.

The facility is one of several tools recently created by the Fed to improve market functioning in the wake of the coronavirus pandemic, which has led to substantial market volatility.

The Primary Market Corporate Credit Facility, which will purchase corporate bonds, will become operational in the "near future," the New York Fed said in a statement here. Both facilities, which were announced on March 23 with a slew of other Fed initiatives, are intended to help keep credit flowing to large employers.

The secondary market corporate credit facility will purchase ETFs that invest broadly in U.S. corporate bonds. The “preponderance” of the Fed’s ETF holdings will be in funds that primarily invest in highly rated U.S. corporate bonds, known as investment grade bonds. The rest of the holdings will be in ETFs that invest in U.S. high yield corporate bonds, the Fed said.

Other factors that will be taken into account when deciding which ETFs to purchase include the share of bonds that are investment grade, the management style and the amount of debt held in depository institutions.

The New York Fed hired BlackRock, a giant asset management firm with $6.5 trillion in assets, to serve as the initial investment manager for the secondary market facility. As part of the agreement, BlackRock must follow investment guidelines set by the Fed. The purchases cannot favor, or “discriminate against” any particular sector or region of the country.

BlackRock must also credit back any fees earned if any of its own ETFs are purchased by the facility.

Reporting by Jonnelle Marte; editing by Sandra Maler & Shri Navaratnam