Investing Talk Investing Talk    FAQ   Search   Memberlist   Usergroups   Register   Profile   Log in to check your private messages   Log in  How do they keep ETFs are the NAV?          Investing Talk Forum Index -> Mutual Funds View previous topic :: View next topic   Author Message Schultz Guest Posted: Wed Apr 04, 2007 9:10 pm    Post subject: How do they keep ETFs are the NAV? Closed-end funds that are not ETFs of course oftentimes trade at significant discounts/premiums to their NAV. However, when I look at discount/premium chart at www.etfconnect.com for any particular ETF, they always have the ETF's share price following precisely the NAV. Is this just do to a very efficient market for ETFs where arbitrage is going on to keep the share prices virtually identical to the NAV, or is there some mechanism in place whereby if the share price starts to differ significantly from the NAV some mechanism kicks in to correct the difference? Thanks. Back to top   Ads Advertising Sponsor Andrew Koenig Guest Posted: Wed Apr 04, 2007 9:42 pm    Post subject: Re: How do they keep ETFs are the NAV? "Schultz" <yomoma@swbell.net> wrote in message news:G5QQh.5032$u03.2761@newssvr21.news.prodigy.net... Quote: However, when I look at discount/premium chart at www.etfconnect.com for any particular ETF, they always have the ETF's share price following precisely the NAV. Well, not quite precisely; but pretty close. Quote: Is this just do to a very efficient market for ETFs where arbitrage is going on to keep the share prices virtually identical to the NAV, or is there some mechanism in place whereby if the share price starts to differ significantly from the NAV some mechanism kicks in to correct the difference? I know how Vanguard does it; I'm guessing other funds work similarly. Financial institutions can sign up with Vanguard to be issuing agents for their ETF shares (I forget exactly what term they use for this, but the idea is right). If you are such an agent, Vanguard gives you a daily list of the specific stocks that make up their ETF for that day. If you want to sell shares in the ETF, you can gather a collection of shares of the relevant stocks, sufficient to make up a fairly large block of ETF shares (I think it's 10,000 shares). Then, you give Vanguard those shares of stock, together with a processing fee, and they give you shares of the ETF which you can dispose of as you please. If you want to buy shares in the ETF, you can collect a sufficiently large block of ETF shares (again, I think it's 10,000 shares), which you can give Vanguard along with a processing fee. In return, you get back an appropriate collection of shares of stock, as specified in Vanguard's daily bulletin. So if the price of the ETF gets too far away from the NAV, there will be issuing agents out there who will notice the arbitrage opportunity.. Back to top   Ads Advertising Sponsor Schultz Guest Posted: Wed Apr 04, 2007 11:11 pm    Post subject: Re: How do they keep ETFs are the NAV? That is very interesting Andrew. Thanks a bunch for the info! "Andrew Koenig" <ark@acm.org> wrote in message news:2AQQh.243999$5j1.63367@bgtnsc04-news.ops.worldnet.att.net... Quote: "Schultz" <yomoma@swbell.net> wrote in message news:G5QQh.5032$u03.2761@newssvr21.news.prodigy.net... However, when I look at discount/premium chart at www.etfconnect.com for any particular ETF, they always have the ETF's share price following precisely the NAV. Well, not quite precisely; but pretty close. Is this just do to a very efficient market for ETFs where arbitrage is going on to keep the share prices virtually identical to the NAV, or is there some mechanism in place whereby if the share price starts to differ significantly from the NAV some mechanism kicks in to correct the difference? I know how Vanguard does it; I'm guessing other funds work similarly. Financial institutions can sign up with Vanguard to be issuing agents for their ETF shares (I forget exactly what term they use for this, but the idea is right). If you are such an agent, Vanguard gives you a daily list of the specific stocks that make up their ETF for that day. If you want to sell shares in the ETF, you can gather a collection of shares of the relevant stocks, sufficient to make up a fairly large block of ETF shares (I think it's 10,000 shares). Then, you give Vanguard those shares of stock, together with a processing fee, and they give you shares of the ETF which you can dispose of as you please. If you want to buy shares in the ETF, you can collect a sufficiently large block of ETF shares (again, I think it's 10,000 shares), which you can give Vanguard along with a processing fee. In return, you get back an appropriate collection of shares of stock, as specified in Vanguard's daily bulletin. So if the price of the ETF gets too far away from the NAV, there will be issuing agents out there who will notice the arbitrage opportunity.. Back to top   Ads Advertising Sponsor Display posts from previous: All Posts1 Day7 Days2 Weeks1 Month3 Months6 Months1 Year Oldest FirstNewest First         Investing Talk Forum Index -> Mutual Funds All times are GMT Page 1 of 1   Jump to: Select a forum Investing Talk----------------Investing Talk-- MarketMutual FundsFutures - OptionsTechnical Analysis  You cannot post new topics in this forum You cannot reply to topics in this forum You cannot edit your posts in this forum You cannot delete your posts in this forum You cannot vote in polls in this forum 246 Attacks blocked Powered by phpBB © 2001, 2005 phpBB Group