In the case of EMSA, the market price is "stale," while the NAV continually updates, creating a perceived premium. In other cases, the opposite occurs. For funds holding securities that trade in a different time zone, such as international equity ETFs, the NAV may be temporarily stale.
For instance, stocks in the U.K. stop trading at 12:30 p.m. Eastern time, but U.S. stocks and ETFs keep trading until 4:00 p.m. For the iShares MSCI United Kingdom ETF (EWU), which holds a basket of U.K. equities, the NAV will be struck at 12:30 p.m., when U.K. markets close, but EWU will continue to trade for another few hours. In those few hours, the fund's trading price could deviate from its NAV.
Bond ETF Discounts
Of course, deviations from NAV can take place both on the upside, creating a "premium," as well on the downside, creating a "discount." The latter is a bit rarer because it's more unusual to see an issuer suspend redemptions than it is to see it suspend creations.
Still, there are a handful of products trading with sizable discounts, mostly due to inactive trading. The iPath Long Enhanced MSCI Emerging Markets Index ETN (EMLB) and the Barclays Return on Disability ETN (RODI) look like they're trading at discounts of 36.9% and 12.9%, respectively, but that's only because they're so infrequently traded (creating the "stale market price" phenomenon described above).
One larger product trading with a notable discount is the AdvisorShares Peritus High Yield ETF (HYLD). Currently it has a 3.1% discount―not huge, but enough to catch one's eye. Bond ETFs have been known to sometimes trade at discounts to their NAVs due to the difficulty of pricing bonds and the lack of liquidity in some bond markets, especially during times of stress.
A discount in a bond ETF doesn't mean a product is bad per se; it's simply a reflection of the liquidity conditions of the fund's underlying bond portfolio.
For investors in bond ETFs―and exchange-traded products of all stripes―large discounts and premiums are a caution sign. In those cases, it's a good idea to take a look under the hood to see if there's any issues with a product, such as a suspension of the creation/redemption mechanism, a lack of liquidity or anything else that may impact returns.
For a list of the 10 ETFs that currently have the largest premiums and discounts, see the tables below:
|DYY||DB Commodity Double Long ETN||97.3%|
|EMSA||iPath Short Enhanced MSCI Emerging Markets Index ETN||92.2%|
|GAZ||DB Commodity Double Long ETN||23.9%|
|HAKD||Direxion Daily Cyber Security & IT Bear 2X Shares||9.0%|
|SBV||iPath Pure Beta S&P GSCI-Weighted ETN||6.3%|
Contact Sumit Roy at [email protected]