Jump to content
The World News Media

Arbitrage


Guest

Recommended Posts

  • Guest

Critics of ETFs often cite the potential for ETFs to trade at a share price that is not aligned with the underlying securities' value. To help us understand this concern, a simple representative example best tells the story.

Assume an ETF is made up of only two underlying securities:

  • Security X, which is worth $1 per share
  • Security Y, which is also worth $1 per share

In this example, most investors would expect one share of the ETF to trade at $2 per share (the equivalent worth of Security X and Security Y). While this is a reasonable expectation, it is not always the case. It is possible for the ETF to trade at $2.02 per share or $1.98 per share or some other value.

If the ETF is trading at $2.02, investors are paying more for the shares than the underlying securities are worth. This would seem to be a dangerous scenario for the average investor, but in reality, this sort of divergence is more likely in fixed income ETFs that, unlike equity funds, are invested in bonds and papers with different maturities and characteristics. Also, it isn't a major problem because of arbitrage trading.

The ETF's trading price is established at the close of business each day, just like any other mutual fund. ETF sponsors also announce the value of the underlying shares daily. When the ETF's price deviates from the underlying shares' value, the arbitrageurs spring into action. Here's how arbitrage sets the ETF back into equilibrium. The arbitrageurs' actions set the supply and demand of the ETFs back into equilibrium to match the value of the underlying shares.

Because ETFs were used by institutional investors long before they were discovered by the investing public, active arbitrage among institutional investors has served to keep ETF shares trading at a range close to the underlying securities' value.

Source

Link to comment
Share on other sites


  • Views 804
  • Replies 1
  • Created
  • Last Reply

Popular Days

  • Guest

 

Arbitrage may be used to bring the market value of an exchange-traded fund (ETF) back into line with the net asset value of the ETF's underlying assets. During the course of the trading day, market price for the ETF naturally fluctuates due to short-term supply and demand forces. If the market price deviates substantially from the net asset value, authorized participants arbitrage differences between those values to bring them back into line. The creation and redemption mechanism is a process by which the market value and net asset value are kept close together.

When an ETF is first created, the issuer enters into an agreement with an authorized participant (AP) who is a larger financial institution. The AP buys the underlying assets represented by the ETF in equivalent proportions to the index the ETF is tracking and places them into large baskets of assets. These asset baskets are then conveyed to the ETF issuer in return for a large block of shares known as a creation unit. Creation units usually contain anywhere from 25,000 to 250,000 ETF shares. The AP can then sell the shares on exchanges or hold on to the shares.

As the ETF shares trade on the exchanges, the price may deviate from the net asset value. This creates arbitrage opportunities for the AP. If the ETF is trading at a premium to the net asset value, the AP can sell shares short in the ETF while buying the underlying assets. At the end of the trading day, the AP delivers the creation basket of underlying assets to the ETF in exchange for more ETF shares. The AP then earns an essentially risk-free profit since its short position is covered by the shares received.

On the flip side, when the ETF is trading below the net asset value, the AP can buy the ETF shares and then sell short the underlying assets. After trading has closed, the AP delivers the shares to the ETF in return for a redemption basket of securities. Once again, the AP makes a virtually risk-free profit by paying less for the ETF shares than it did for the underlying assets. Further, this process reduces the outstanding supply of ETF shares, which helps support the price.

The net asset value is the value of each share's portion of the underlying assets and cash owned by the ETF, including the value of any dividends received. It is calculated on a per-share basis after the end of the trading day. The formula for the net asset value is to add all the ETF's assets including cash, subtracting any liabilities and then dividing that sum by the number of outstanding shares. The net asset value is easily accessible by investors on the ETF issuer's website. The net asset value can also be used as a performance indicator for actively managed ETFs.

 

 

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...




  • Recently Browsing

    • No registered users viewing this page.
  • Popular Contributors

  • Topics

  • Posts

    • It appears to me that this is a key aspect of the 2030 initiative ideology. While the Rothschilds were indeed influential individuals who were able to sway governments, much like present-day billionaires, the true impetus for change stems from the omnipotent forces (Satan) shaping our world. In this case, there is a false God of this world. However, what drives action within a political framework? Power! What is unfolding before our eyes in today's world? The relentless struggle for power. The overwhelming tide of people rising. We cannot underestimate the direct and sinister influence of Satan in all of this. However, it is up to individuals to decide how they choose to worship God. Satanism, as a form of religion, cannot be regarded as a true religion. Consequently, just as ancient practices of child sacrifice had a place in God's world, such sacrifices would never be accepted by the True God of our universe. Despite the promising 2030 initiative for those involved, it is unfortunately disintegrating due to the actions of certain individuals in positions of authority. A recent incident serves as a glaring example, involving a conflict between peaceful Muslims and a Jewish representative that unfolded just this week. https://www.theguardian.com/world/2024/mar/11/us-delegation-saudi-arabia-kippah?ref=upstract.com Saudi Arabia was among the countries that agreed to the initiative signed by approximately 179 nations in or around 1994. However, this initiative is now being undermined by the devil himself, who is sowing discord among the delegates due to the ongoing Jewish-Hamas (Palestine) conflict. Fostering antisemitism. What kind of sacrifice does Satan accept with the death of babies and children in places like Gaza, Ukraine, and other conflicts around the world, whether in the past or present, that God wouldn't? Whatever personal experiences we may have had with well-known individuals, true Christians understand that current events were foretold long ago, and nothing can prevent them from unfolding. What we are witnessing is the result of Satan's wrath upon humanity, as was predicted. A true religion will not involve itself in the politics of this world, as it is aware of the many detrimental factors associated with such engagement. It understands the true intentions of Satan for this world and wisely chooses to stay unaffected by them.
    • This idea that Satan can put Jews in power implies that God doesn't want Jews in power. But that would also imply that God only wants "Christians" including Hitler, Biden, Pol Pot, Chiang Kai-Shek, etc. 
    • @Mic Drop, I don't buy it. I watched the movie. It has all the hallmarks of the anti-semitic tropes that began to rise precipitously on social media during the last few years - pre-current-Gaza-war. And it has similarities to the same anti-semitic tropes that began to rise in Europe in the 900's to 1100's. It was back in the 500s AD/CE that many Khazars failed to take or keep land they fought for around what's now Ukraine and southern Russia. Khazars with a view to regaining power were still being driven out into the 900's. And therefore they migrated to what's now called Eastern Europe. It's also true that many of their groups converted to Judaism after settling in Eastern Europe. It's possibly also true that they could be hired as mercenaries even after their own designs on empire had dwindled.  But I think the film takes advantage of the fact that so few historical records have ever been considered reliable by the West when it comes to these regions. So it's easy to fill the vacuum with some very old antisemitic claims, fables, rumors, etc..  The mention of Eisenhower in the movie was kind of a giveaway, too. It's like, Oh NO! The United States had a Jew in power once. How on earth could THAT have happened? Could it be . . . SATAN??" Trying to tie a connection back to Babylonian Child Sacrifice Black Magick, Secret Satanism, and Baal worship has long been a trope for those who need to think that no Jews like the Rothschilds and Eisenhowers (????) etc would not have been able to get into power in otherwise "Christian" nations without help from Satan.    Does child sacrifice actually work to gain power?? Does drinking blood? Does pedophilia??? (also mentioned in the movie) Yes, it's an evil world and many people have evil ideologies based on greed and lust and ego. But how exactly does child sacrifice or pedophilia or drinking blood produce a more powerful nation or cabal of some kind? To me that's a giveaway that the authors know that the appeal will be to people who don't really care about actual historical evidence. Also, the author(s) of the video proved that they have not done much homework, but are just trying to fill that supposed knowledge gap by grasping at old paranoid and prejudicial premises. (BTW, my mother and grandmother, in 1941 and 1942, sat next to Dwight Eisenhower's mother at an assembly of Jehovah's Witnesses. The Eisenhower family had been involved in a couple of "Christian" religions and a couple of them associated with IBSA and JWs for many years.)
  • Members

    • Avrek

      Avrek 0

      Member
      Joined:
      Last active:
  • Recent Status Updates

  • Forum Statistics

    • Total Topics
      65.4k
    • Total Posts
      158.9k
  • Member Statistics

    • Total Members
      17,670
    • Most Online
      1,592

    Newest Member
    Apolos2000
    Joined
×
×
  • Create New...

Important Information

Terms of Service Confirmation Terms of Use Privacy Policy Guidelines We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.