2 posts in this topic

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.


Share this post

Link to post


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.



Share this post

Link to post

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing

    No registered users viewing this page.

  • Topics

  • Posts

    • Wow; apparently I must have struck a nerve. Lecture you? Ok, TRAVELLER; listen up and listen good. First of all, before I even responded to you I did read those links you shared on this forum and, what is more, I already knew about these cases long before you made it an issue here, as well as the ones that YOU don't even know about. So, what makes YOU  think I'm not aware of this happening in the organization? No one said Jehovah's organization is squeaky clean and ever so righteous as you so eloquently put it. Don't even go there suggesting I'm naive. Let me tell you buddy; I've seen and know just about everything the Apostle Paul mentioned in 2 Corinthians 6:9, 10; from Circuit Overseers, to Elders, to Missionaries, Special and Regular Pioneers, to publishers. EVERYTHING! Those who suppose to shepherd the flock were disfellowshiped for fornication, adultery AND homosexuality! Missionaries kicked out of their assignments for immorality. Pioneers swapping their spouses, Publishers raping other publishers, etc. I even know of about a brother who killed his wife so he could continue his affair with a porn star! So don't even ASSume I'm looking at the Spiritual Paradise with rosy-colored glasses on! I've seen it all! But just because I have 37 years in the Truth does not give me license to use this forum to broadcast every deplorable thing that goes on inside Jehovah's organization! That I refused to do! This is a forum to encourage one another. What's so encouraging about what you posted? Sadly, you must think the majority of us here, like Tom, are downplaying the serious nature of these events and we're not. It's just that we choose to find strength in knowing that sexual predators and those who use religion as a cover to abuse children will get what's coming to them by means of Christ Jesus' sword. And that right soon! Second: What is your motive? When you posted these links, the first thing I asked myself was why? Why did you take the merriment out of a photo meant to project humor only to harp on this disgusting tragedy when it is up to the ultimate Judge of us all - Not the Governing Body, not the Elders - JEHOVAH GOD who sees and knows everything?!  Judge you? Who, me? I don't have to Judge you; you judged yourself. Posting these depressing news articles is suppose to do what? Make the majority of us question the Governing Body's motives?  Yeah, you talk about your advocacy but even that is questionable. Advocate the real solution - what Jehovah is going to DO about those who prey on children and who violate His righteous laws, whether it's the Governing Body or Elders. No one is exempt from the day of His wrath. And about this forum. I thought it is for encouragement and sharing theocratic news; what's going on around the world in harmony with scriptural prophecies. That's what this forum is for. You are obviously not using it for that purpose. My point is that you used this opportunity to negate the photo with child sex abuse within Jehovah's org. rather than find the humor in it as it was suggested, and as many here have humorously contributed to. You took it to another level and it reeks of criticism! It's as if you pacified the Pope to unleash on your brothers! Now, here's something for you to wag your finger at since you defensively done so with me - Q: What do you have to say about those who were sexually abused as children by worldly people? That is also NOT A FUN TOPIC! So many of Jehovah's people were - and some still are - victimized by Shechemites in this world. Are you exempting them just because they are worldly? What encouragement would you offer a sister or brother who were subjected to or are being subjected to such abuse by worldly sexual predators? Would you plaster links all over this forum about it? Just wondering if you would have the same passionate advocacy for these victims as you do for Ann and the others. Third: As far as your personal relationship with Jehovah; you're right. I don't know how close you are to our precious Father. But I do know, as your spiritual sibling, you took the fun out of things and I'm telling you about it whether you like it or not. Get mad all you want to. Go and tell our Heavenly Father on me. Go ahead! Perhaps he'll lovingly chastise us both for making a mountain out of a mole hill. Or you'll get over it and move on.  Now get all this through your thick skull.
    • Programa do Congresso Regional de 2017
      Já está disponível o programa para o congresso regional desse ano. Acessem o link para baixar o programa e vê-lo!!!
      Download: https://www.jw.org/pt/publicacoes/livros/Programa-do-congresso-de-2017/
    • Children that praise God Jehovah  Little Katie excited to help others about Jehovah God.