![]() The important thing to remember is that ETFs generally trade close to their fair value, and premiums or discounts tend to be short-lived. Lyxor said its motive was to protect the holders of the ETF, since there was a risk the price of the ETF could have been manipulated in the absence of activity in the underlying market. Despite the fact that GREK, a well established ETF that tracks a market-cap weighted index of Greek equities, continued to trade in New York, Lyxor, its asset manager, imposed a block on investors withdrawing money from GREK. A case in point: the 2015 Greek market crisis. ![]() Depending on the severity, the issuer may even have to halt the creation of new ETF shares.ĮTF trading can also be vulnerable to disruption when market conditions become volatile. Other times, restricted access to the underlying securities could be symptomatic of more serious structural problems. ![]() Sometimes access is just a time challenge: For ETFs holding international securities, there could be a delay before the AP is finally able to access the underlying market and effectively create or redeem ETP shares-the delay can lead to temporary premiums and discounts. In order for an authorized participant (AP) to create or redeem shares quickly, he or she needs access to the underlying securities-which is not always possible. That said, not all premiums and discounts quickly self-correct some persist for a variety of reasons. Thanks to the creation/redemption mechanism, deviations between ETF price and its NAV tend to be short-lived. How are premiums and discounts corrected? In this case, any significant deviation between ETF price and NAV will likely vanish when both exchanges are open at the same time. The price of these ETFs will reflect real-time changes in market sentiment, while NAV will be based on stale prices from the earlier LSE close. It’s not uncommon for those ETFs to trade significant volume after the London Stock Exchange closes at 11:30 a.m. Similarly, if pessimistic investors sell an ETF aggressively, more so than its underlying securities, the ETF may trade at a discount.Īlternatively, premiums or discounts may arise because the ETF and its underlying securities trade on exchanges that are in different time zones.Ĭonsider the scenario of ETFs listed on the NYSE that track the FTSE 100. If optimistic investors start bidding up an ETF aggressively-more so than its underlying securities-the price of the ETF may rise faster than the price of its underlying securities and, consequently, it may trade at a premium. This can happen throughout the trading day, because the ETF and its underlying securities are actually two distinct liquidity pools that are only loosely linked.
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