ETF Premiums That Aren’t

May 30, 2012

Beware what you read about ETF trading. Half the time, it’s just plain wrong.

A quick note to those folks out there reading scary headlines about ETFs “collapsing.”

Today Brendan Conway committed what’s an all-too-common error in his blog, on surprised “crashes” in three ETNs: (NYSEArca: CHOC), (NYSEArca: NINI) and (NYSEArca: CTNN), the iPath Pure Beta ETNs tracking cocoa, nickel and cotton.

Most likely, he was looking at the “big movers” on a screen somewhere, and noticed that, for instance, NINI was “trading at $29.94, down $3.51.” And indeed, that’s what the screen shows:

NINI quote

The problem is that the previous trade—the trade at $33.45 that shows us this huge collapse—is from April 26. That’s right, over a month ago. But it will still drive Web traffic and headlines

When a forgotten ETN or ETF—or frankly, a forgotten stock, if there are any this thinly traded—just doesn’t trade for days at a time, its “closing” price remains the same as its “last” price indefinitely.

That means that any system calculating premiums/discounts off of these old prints is going to look like this:

NINI premium


Holy cats! The ETN had a 9.4 percent premium to its fair value going into today!

Umm, well, no. What it had was a print so old it made the data look like a mirage of unfair-value, ripe for arbitrage. I would say that errors like this should be rare and easy to avoid, except that not a day goes by when I don’t read a headline about “premiums” and “collapses” in thinly traded ETNs and ETPs, or get an email from someone thinking they’re either a genius or a fool.

The good news is that these kind of issues are entirely avoidable.

Intraday net asset values, or iNAVs, are available for all ETNs and ETFs, and you can simply match these against live, quoted bids and asks. That’s what tells you whether a fund is really at a premium.

Oh, and NINI? It may be trading with enormous spreads of nearly 10 percent, but guess where those spreads are straddled over today—and pretty much every day.

Fair value.

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