Author Topic: ETF mispricing; fund NAV Vs. underlying assets  (Read 1339 times)

force majeure

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ETF mispricing; fund NAV Vs. underlying assets
« on: September 27, 2015, 12:39:48 PM »

Indexer

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Re: ETF mispricing; fund NAV Vs. underlying assets
« Reply #1 on: September 27, 2015, 06:00:05 PM »
ETFs are a double edged sword compared to mutual funds.

ETFs can be traded during the day, but the cost of that flexibility is that they fluctuate like an investment that can be traded during the day. Extreme volatility can push the price pretty far in one direction if there aren't enough buyers or sellers. Under normal circumstances if the price moves a certain % from the actual value someone is going to seize that arbitrage oppurtunity. On the morning of August 25th when the markets first opened there were a whole lot more sellers than buyers and not even enough arbitrage speculators to clean up the mess.

(I didn't mention that ETFs tend to have lower fees because when you are looking at ETFs & index funds tracking the same index they actually tend to be about the same.)

hodedofome

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Re: ETF mispricing; fund NAV Vs. underlying assets
« Reply #2 on: September 28, 2015, 09:34:30 PM »
I knew some people buying those ETFs at 50% discounts. Wish I was one of them.


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patrickza

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Re: ETF mispricing; fund NAV Vs. underlying assets
« Reply #3 on: September 29, 2015, 01:22:22 AM »
We work differently in South Africa. Our ETFs always have a market maker, a kind of a robot that will always buy or sell to ensure liquidity. They work at a small spread, maybe 0.2%, but it does keep the ETF very closely matched to the value of the underlying shares. Without it I would never be able to buy my favourite ETFs, as we just don't have that many traders in them. Sadly that means I can't profit on that discrepancy like I know a few people have done.