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GYLD's Drop: A Real ETF Pricing Error

By
Matt Hougan
June 25, 2013
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I wrote yesterday about fake ETF pricing ‘errors’ in the market. But real pricing errors happen all the time.

 

Take a look at what happened to the ArrowShares Dow Jones Global Yield ETF (NYSEArca: GYLD) yesterday.

GYLD is an interesting, well-run fund from a smart and focused startup ETF provider. The fund is well established in the market, with $84 million in assets. It has decent trading volume of nearly 50,000 shares per day; tracks its index well; and provides interesting, diversified exposure to five high-yielding segments of the market:

  • Global sovereign debt
  • Global equity
  • Global real estate
  • Global alternative
  • Global corporate debt

 

Its 30-day SEC yield is a healthy 5.77 percent.

In other words, it’s a good ETF.

And yet, for the first 90 minutes of trading on Monday, June 24, GYLD traded terribly.

The fund opened down about 2 percent on the day, on par with the broader market. Then, things went crazy. A handful of market orders—small lots of 300 shares, 500 shares, 135 shares—walked the price down to the point where GYLD was off nearly 10 percent. The S&P 500, at the time, was down “just” over 2 percent.

GYLD Premium/Discount

As the equity markets stabilized, so did GYLD. It traded more or less flat for the better part of an hour, and then, in less than 10 minutes, rebounded more than 6 percent. It eventually ended the day flat.

This was ETF Mispricing 101. During the dip, GYLD traded at a real and substantial discount to its underlying value. Anyone who sold at the bottom got ripped off, and anyone who bought was happy as a clam.

How do you make sure you’re on the right side of that trade?

The answer is not to rely on the indicative net asset value (iNAV). More than 60 percent of GYLD’s holding are international, and as I wrote yesterday, you can’t rely on iNAVs for funds holding international securities. They’re meaningless.

Instead, you have to be a little smarter. We started looking into GYLD’s pricing shortly after 10 a.m. Eastern time, as it was one of the biggest negative movers on the market. Its big move seemed fishy; GYLD typically has a low beta to the market, so you don’t expect it to be leading the charge downward.

Our fears were confirmed when we compared GYLD’s move with those of similar funds.

 

ETF DAILY DATA

Investors plowed money into currency-hedged equity funds like ‘HEDJ’ and ‘DBEF’ on Wednesday, March 4, while yanking assets out of sundry bond funds, such as ‘HYG.’ Total U.S.-listed ETF assets dropped to $2.084 trillion as a market pullback offset net inflows.

Sizable outflows from various iShares bond funds paced that firm’s outflows on Wednesday, March 4. Total U.S.-listed ETF assets ended the day at $2.084 trillion.

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