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Navigating ETF Discounts and Premiums During Turbulent Times – A U.S. Example (Part 3)

Some examples of premiums and discounts at different scenarios.

Ben Johnson 06 May, 2020 | 18:30

In part 1 and 2 of this article, we saw the unprecedented dislocations in ETF discounts and looked at the basics of ETF premiums and discounts. In this part, we will look at some examples of premiums and discounts at different scenarios and discuss how investors can monitor and manage premiums and discounts?

Examples of Persistent Premiums and Discounts

Of the 645 ETFs included in the sample I've referenced above, those that have exhibited the largest and most persistent premiums and discounts share some common characteristics. Of the 20 funds that had the largest median premium or discount during the past decade, 12 were international- or global-equity funds. Some or all of the stocks in these funds' portfolios trade on exchanges outside the United States, and their home exchanges' trading hours may have little or no overlap with U.S. trading hours. During these nonoverlapping hours, there is no real-time price information flowing from their constituent securities' home markets. In these windows, the funds effectively serve as "price discovery" vehicles, with buyers and sellers agreeing on fair values for a basket of stocks or bonds that may not be currently changing hands in their local markets. Thus, these premiums and discounts are part of the normal course of business in those cases where trading of an ETF's shares and trading of its portfolio holdings are out of sync.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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